The Ultimate Guide To A Monthly Budget And How To Stick To It (Point #3 Is The Hardest)

Imagine this: just following a simple set of rules every month. 10 years later, you check your finances and realise you’re already 50% on your way to financial freedom. Boom!

Yet, many people have trouble creating budgets and sticking to them.

I’m here to help. About four years ago, I wrote my first budgeting article. Since then, it’s unexpectedly become one of my most popular articles ever.

So here's an updated version for 2018 and beyond. It’s not that my principles of budgeting have changed. But I’ve learned a lot more about money and life over the past few years. I also wanted to cover more into the psychology behind budgeting: why is it so powerful, and how to make it work?

Here's my ultimate guide to monthly budgeting.

A monthly budget is a plan of how to spend your monthly salary. And it could look something like this:

1. Net Salary (after EPF/SOCSO/EIS/tax): RM4,800
2. Home Loan: RM2,200
3. Car Loan: RM1,000
4. Giving to Parents: RM500
5. Insurance: RM300
6. Transport: RM300
7. Food: RM1,000
8. Balance: -RM500

Okay, the above is obviously a bad example, but it illustrates an important point: if you don't plan your finances well — it’s very easy to end up broke at the end of every month.

Ever felt that way? Yeah, I hate feeling pokai too.

Allowed to continue for a long time, it’s highly likely that you spend most of your life working — but have no money for retirement at all.

Thankfully, this is where budgets can save us: A budget helps you plan your spending — so you have enough money for your needs, savings for your future, and a little cash to have fun!

“Sounds great. But if it were so easy, then everybody would be financially secure right? How come it doesn’t work for most people then?”

Glad you asked. So before we go into the details of creating a budget, let’s first talk about why budgets fail.

Most people don’t even have a budget. And even for those who do, I hear that most can’t make them work.

It would be easy to blame people for not having enough discipline, but that’s oversimplifying things. When a lot of people fail at something, we need to look deeper into human behaviour.

With that, I will leave my hypothesis here that people are generally:

. Lazy
. Look for quick rewards (instant gratification)
. Have limited willpower

Which is totally at odds with how budgeting works. To make a budget work, instead, you’ve gotta work hard, be able to delay gratification and have discipline.

That’s why most people fail at budgeting — it’s really quite the opposite of human nature.

And if we’re designing a practical system — whether it’s a diet plan, fitness plan, or budget — we have to take into account all these human factors. We have to design for people, otherwise, it’ll never work.

But before that, I feel I need to share something…

Sticking to budgets feels natural to me.

Okay, this might sound like I’m bragging, but I had to write this section so you know where I’m coming from.

You know how different people have different talents and superpowers? Like maybe you’re a really good people person — you can quickly make people feel comfortable around you, and charm them with your stories.

Well, apparently, mine happens to be personal finance. Now you might ask why, but I honestly have no idea. Maybe it’s a cultural thing (insert racist joke about Chinese here).

To me, optimising money feels like a really fun game. I could spend days building personal finance spreadsheets alone. But I understand that other people may find it boring, intimidating, or even downright scary. Maybe you’re allergic to Microsoft Excel.

(This is similar to why some people can stay slim, but some struggle with weight. It’s not so much that fit people are mentally stronger, it’s more than fit people find exercising fun.)

So it’s okay if you find personal finance difficult. If it doesn’t come naturally, you might need to put in more willpower and effort. You might need to find creative ways to make it more fun.

But I’ve never come across anyone who regretted trying to be better with money. It’s something that will absolutely improve your life.

With that, let’s look at how to create a budget.

I believe in percentage budgets. That is — you decide how much to spend on things in your life based on a percentage of your take-home salary.

For example, how do you know if paying RM 1,000 per month for a new car is “too much”? How do you know if splashing RM 450 per month on Starbucks is a good idea? Well, convert those into a percentage of your monthly salary, then compare it to a benchmark to see.

Here are a two popular “benchmarks” you can easily find on the Internet:

Elizabeth Warren's 50-30-20 Rule

(All percentages are "after-tax." If you’re Malaysian and wanna make it easy — just take your net salary: the one after your EPF/SOCSO/EIS/tax.)

50%: Needs: Home Loan (or Rent), Car Loan, Insurance, Transport and Food.
30%: Wants: Mobile Plan, Phone, Internet, Coffee, Entertainment and Gym.
20% Savings/Debt: Emergency Savings, Investments and Credit Card Debt (I strongly believe you should never have credit card debt, but this is in case you already do).

The 50-30-20 rule is probably the most popular guide on the Internet right now and has a nice ring to it. I like to use it as a general guideline.

It was popularised by Elizabeth Warren, who was a Harvard professor and is now a famous American politician.

Dave Ramsey's Rules

Dave Ramsey is one of the English-speaking world’s most famous writers about money. His budgeting rules are a lot more detailed than the 50-30-20. For comparison’s sake, I’ve listed them down below:

Housing: 25 – 35%
Insurance: 10 – 25%
Food: 10 – 15%
Transportation: 10 – 15%
Personal: 10 – 15%
Giving: 10 – 15%
Saving: 10 – 15%
Utilities: 5 – 10%
Health: 5 – 10%
Recreation: 5 – 10%

Do all these categories and numbers make your head spin? It’s okay, let’s do this slowly. Now that we’ve looked at some popular benchmarks on the Internet, let’s now look at mr-stingy’s recommended budget.

Here’s what I recommend for a middle-income person/family in Malaysia today (percentages based on take-home salary):

. Home Loan / Rent: 30%
. Food & Living Expenses: 20%
. Transport: 15%
. Investment & Savings: 15%
. Personal / Fun: 10%
. Giving: 10%

And here’s some further explanation of each category:

Home Loan/Rent: 30%

The “30% for housing” rule isn’t mine. It’s actually a common financial guideline used by finance professionals. The reason behind it is you don’t want too much of your salary to be stuck in loans.

Imagine having 60% of your salary disappear every month just to pay the banks. Terrible right? Especially in uncertain economic times — what happens if you touch wood lose your job?

And yes, I know in Asia we seem to be crazy about owning houses at young ages. Nothing wrong with that. But there’s also nothing wrong with renting until you can properly afford a home too.

(P.S. Over long periods of time, property prices don’t appreciate as much as you probably think. It’s only 4-5% annual growth over the past 35 years.)

Food & Living Expenses: 20%

This portion is for things you can’t live without — like groceries, soap, and your monthly Internet.

Transport: 15%

Now we get to the controversial part. How much should you spend on your vehicle? Well, I say try to keep transport costs below 15% of your take-home salary: including car loan, petrol, tolls and parking.

Does that mean you should only drive a Perodua? Maybe. You could drive a BMW too — but you’d need to be earning a lot. Because cars are really expensive in this part of the world.

BTW — if you spend less than 15% on transport — that frees up money for other things. For example, here’s a fun thought experiment: maybe drive a basic car, but have a lot more money for family holidays?

The opposite of this is also true: maintain an expensive car — and you’ll have a lot less money for everything else.

Investment & Savings: 15%

This is the part that gets you to financial independence. 15% is a nice base target to aim for, but of course — the more you save and invest — the faster you reach your financial goals. Wanna retire in 10 years? Save 70% instead.

Also, remember that these budget percentages are based on your take-home salary. Meaning for a salaried person, he/she already has another 23% (of gross salary) saved in the EPF retirement fund. That’s 11% of your own contribution and 12% from your employer.

If you think about it — that’s actually a lot. 23% (of gross) plus 15% (of take-home). Give it 30 years to grow and you’re looking at a nice amount for retirement.

P.S. if you work for yourself, because you don’t have EPF — you might wanna save more than 15%.

Personal & Fun: 10%

All work and no play makes Jack a dull boy. Don’t forget to allocate some money for you to enjoy the simple pleasures of life too. Take your partner out for a nice dinner. Book a massage. Plan a holiday.

If you’re new to budgets, you might be tempted to cut this portion out. You might think that budgets need to be communist-strict, and all money should be only for “useful things.” Don’t do that!

Making your budget overly strict — with nothing to keep it fun and enjoyable — will demotivate you. Instead, make sure you spend this “fun money” to reward yourself.

It’s important to be responsible with your money. But don’t forget to live a little.

Giving: 10%

I left this portion for last, but I recommend you pay this first.

No matter your financial situation in life, there will always be people who are less fortunate than you. Please allocate some money to help them out too.

Money may make the world go round. But kindness and mercy are what makes us human.

But the numbers only tell one part of the story. Remember at the beginning how I said that most people fail to stick to budgets?

I’d be doing a disservice if I just left the numbers above, but didn’t share some thoughts on making budgets work.

And I don’t want you to fail, so here are my best tips:

This goes back to human behaviour. We’re lazy, look for quick rewards, and have limited willpower remember?

Personal example: When I first started working many years ago, I could never save any money. Why? Because I planned to save at the end of every month. My theory was: “I’ll save what’s left over.” Of course, by the time I got to the end — there was nothing left. I would spend everything (and more).

I only changed my financial destiny by forcing myself to save/invest immediately when my salary arrived.

So take your willpower out of the question. For things like investments, savings and loan repayments — I recommend you have these automatically deducted from your salary — as soon as you get it.

How? Set up a standing instruction with your bank. Tell the bank to automatically do this every month on the day after you receive your salary.

Take the money away from your only-human self and put it somewhere good — before you do something silly with it.

If you’re not already tracking your monthly spending, I recommend you start immediately. It’s one of those “Aha! Moment” things. Before you do it, you won’t realize what you’re missing out on.

And once you do it, you’ll probably end up frightened by how you’re spending your money. I say this not to scare you — but it’s a good kind of fear. The type that makes you reevaluate priorities: “Do I really wanna be spending 10% of my salary on coffee?”

Tracking your spending might sound like a huge burden, but today — we have an app for everything remember?

Think about it. Our predecessors who wanted to be good with money had to write down their daily spending in Buku Tiga Lima 555, then tally up everything by hand at the end of the month — and they still did it. I’m sure each of us can tap our phones <30 times extra every day without dying.

It’s really easy. Every time you spend money, just key in the amount, and put it in a budget category (e.g. Food or Transport). Takes 10 seconds. Just try it out for a few months — you’ll be amazed at what you find out.

Personally I use Monefy app, but I’ve been hearing a lot of good things about Money Lover as well.

Most of us actually wanna be good with money. Most of us want comfortable lives with luxuries. But not many of us have enough willpower to withstand temptation.

I’m not judging. One of my hobbies from long ago was hanging out in shopping malls. So I’m at fault too. When you keep looking at advertisements and promotions — you end up feeling like there’s something missing in your life. Like you need to buy something.

That’s the power of companies and advertisers today: they’re damn good at convincing you to spend money.

So take a good, honest look at yourself. Check your money app to see where you’re spending most of your money — your “weakness.” If you’re spending too much drinking at Zouk, the solution is not to try ordering cheaper bottles. Because some pretty lady in a tight dress is still gonna convince you to give up your credit card for her “Limited Edition 2 Bottles for RM 1K” deal.

Instead, the solution is to replace (some?) Zouk sessions with Saturday Night Football at your neighbourhood Mamak. Where the biggest temptation is an RM7 Maggi Goreng and RM 3 Milo Ais from a very-unfriendly Anne.

But your weakness could be anything else. Maybe it’s the bedding section at Ikea. Maybe it’s AirAsia’s Flash Sales. Or maybe it’s Lazada. Whatever it is, if it’s f*cking up your budget — stay far away from it.

Remember, the spirit is willing, but the flesh is weak.

Your budget isn’t a fixed set of laws. Remember to review how you’ve been doing from time to time, then tweak it to make it work for you.

For example, if you’ve budgeted 10% to spend on transport but find yourself only using 5% every month (lucky you), you could then shift more money towards “Fun.” Or maybe you want to increase your Savings to 25% for your future marriage and child’s education.

On the other hand, maybe you’ve decided to limit 5% of your salary for drinks with friends. But you find that you’re really sad because you don’t see them much anymore. Nothing wrong with reducing some other spending, and allocating more here — so you can be happier.

It’s up to you, but a budget is a live thing. The key is to make it work for you, while still being responsible.

Like anything new, when you first try to budget — you might fail, often miserably. But don’t be too hard on yourself.

Maybe you’ve made some silly purchases in the past, and you’re really deep in debt. And you feel that the 15% savings target I threw out is unrealistic. “How the f*ck am I supposed to save 15% when I can’t even afford to pay all my bills?”

At this point, it’s very easy to say “Screw this!” and give up. But I don’t want you to.

My intention of throwing numbers out isn’t to make you feel small, or like personal finance is unrealistic. Instead, I just wanted to give a guideline to people who are starting out. It’s just a base target number. If you’re not there yet, start working towards it.

Just thinking about a budget is infinitely better than not knowing what a budget is. Trying and failing your first budget is infinitely better than not having one at all. And having 1% savings is infinitely better than having 0%.

The way to successful goals is by making small steps and progress. So don’t worry too much about the end goal. Just worry about improving every day.

Someday you’ll get there.

Something that budgeting advice often fails to consider is income level. This is especially true if you read foreign-based articles from first-world countries — where their incomes are higher.

Because it gets easier to budget when you earn a lot. But low-income workers will always struggle. For example, if you’re earning RM8,000 a month and finding it hard to stick to a budget, your problem is more likely motivation and discipline.

But no matter how mentally strong a person is, it’s gonna be crazy difficult to stick to a monthly budget of RM1,000 and try to feed a family.

Makes sense?

So as much as budgeting is important, it’s only one side of the equation.

Put simply, the path to financial stability consists of this: making money and keeping the money. Budgeting will help you with keeping the money. But if your income is low, you’ll also need to figure out how to make more money.

Otherwise, you’ll continue to be stuck in this poverty cycle, which gets incredibly hard to get out of.

And while there is no one size fits all, I hope this has given you some ideas on how to create a budget (if you don’t have one yet), and how to improve sticking to it (if you already do).

When it comes to accumulating wealth, good habits will serve you well for your entire life. They might seem trivial, but with the right habits in place, hopefully, you’ll wake up one day 20 years later, check your balance and realize — hey you finally did it! You’re financially free!

That’s the power of budgets. The power of systems and habits.

But time is of the essence. And it slips away too fast. That beautiful future may seem far away, but its road leads right back to where your feet are right now. Where you have an incredible power — the power to decide what type of future you want.

And if you’ve decided you’re gonna get that better financial future, there’s no better time to start than today.