how to budgeting

How to: Budgeting Money in 7 Simple Steps

If a budget is a plan for how you spend your money, then budgets are dead, you hear me? Dead. 

Let’s explore exactly why these financial budget diets don’t work, how you can follow the three golden budgeting rules and how to set-up an effective money management system in 7 simple steps.

Key points

The Three Golden Rules

The 7-Step Money Map

Why traditional budgets don’t always work

Do you ever get it when you know you should do a budget, but don’t know why you should do it? Because someone else said so. If you go about doing your budget mindlessly or halfheartedly, it will end up being a waste of time.

What we normally envision as budgets are unhelpful, time-consuming and a poor source of motivation. They are like diets that focus on making you skinny instead of promoting healthy eating habits.

Creating and sticking to a planned budget is an act of self-discipline. Almost every budget I’ve done up until this point looks nothing like how much I actually ended up spending.

Firstly, we spend way too much time overthinking trivial purchases and guilt tripping ourselves about buying our morning coffees or weekend brunch. 

But our ability to bend ourselves to our own will is a limited resource. Even judges are no exception. It’s called decision fatigue. Studies have been conducted that show prisoners who had their case heard early in the morning were 7x more likely to receive parole than those who were scheduled for the afternoon session. 

This leads to another side effect, impulse spending. Little by little we tire of holding ourselves back from enjoyment, so we splurge to get emotional release. Which feels cathartic at the time. How can we spend without feeling like we’ve got an Excel spreadsheet breathing down our necks?

The “50/30/20 rule” is not one-size-fits-all

This rule says you should spend half your salary on needs and obligations in order to not end up in debt. After that, 20% of your income must go toward savings and 30% towards your wants or entertainment.

Firstly, the 50/30/20 rule doesn’t make sense when you get pay raises. This leaves you susceptible to lifestyle creep. The logic states you are entitled to “want” more, because you could play within the bounds of that 20% or whatever cap and technically still afford it. 

The greater your salary, the more valuable your time is.

Secondly, sticking to the 50/30/20 rule is like wearing a suit tailored to someone else’s measurements. How can we apply a one-size-fits-all method when we all have different goals and lifestyles? 

Let me show you how this compares to my current situation.

50/30/20 budgeting rule
My actual income allocation vs. the 50/30/20 rule

As you can see, I am a natural saver. I’m not consciously trying to stinge. My simple pleasures include reading books on the life of Warren Buffett and the occasional Korean barbecue with friends. These don’t require as much money as someone who plays a club sport and lives in a higher cost of living area. 

But if I followed the 50/30/20 method, I should increase my spending by under 50% of my take-home pay and cut savings by 40+%!

“Think of the 50/30/20 rule as lifeguard flags. It’s an indicator for when things are getting out of hand.

In reality, we all chart a unique path through life. A rigid budgeting rule doesn’t always allow for this. 

Why the “pay yourself first” rule doesn’t always make sense

The idea of paying yourself first is to set aside a portion of your pay check to savings before spending it. The theory is that this will develop good habits for long-term net savings and have you less tempted by the forces of instant gratification.

The “pay yourself first” becomes insignificant if you automate your cash transfers. I think automation is the more sensible option (more on this below).

It also doesn’t make sense because:

  • It doesn’t say how much you should pay yourself. You could pay yourself first for 40 years and still find the amount you set aside for retirement falls short of your living costs if you don’t sit down and crunch the numbers.
  • Budgets are not about financial abstinence. If you’re stinging on Present You, then you’ve gone too far. It’s so easy to go down this path, especially if you are the type to be hard on yourself (which I think a lot of women are).
  • It’s not always possible to save money before spending it. 
  • If you are saving money for a particular purchase, then you are not going to be tempted by other purchases that might come along as well.

Secondly, the “pay yourself first” rule doesn’t encourage you to address the root cause, where there might be emotional spending or stinging at play. It implies the amounts you spend today don’t count as paying yourself. 

The true inter-temporal dilemma we face is this:

Managing your money is a delicate balancing act between nourishing both Present You and Future You.

The crux of the matter is that you need to truly come to terms with the concept of long-term financial wellbeing.

Reward yourself now and set some aside to reward yourself later. This is finding your center of balance.

Now, while we won’t be throwing the budget out with the bathwater, there is a better way to do it.

Why you should make yourself a Money Map instead

Cue the Money Map, where you start with your actual income and expenses! You then automate your money flows based on a set of thoughtful spending / saving habits that align with your priorities.

When you ask Google for directions, it shows you three things:

  • Point A
  • Point B
  • Your route (various options and how long they will take)

This is what your goals-based budgeting needs to show.

What the Money Map sets out to achieve

  • Give an accurate summary of your current state of affairs
  • Illuminate the steps you need to take to succeed in your goals
  • Visualise your progress in a tangible way
  • Sharpen your awareness of the implications of financial decisions you make today
  • Value your time and get your priorities straight (we forget sometimes, right?)
  • Personalise the financial planning aspect

Having clarity on the way forward to achieve our goals is a form of psychological well-being. 

The Money Map shifts the focus from forecasting your expenditures to making sure that you’re spending in a way that works for you. We need balance. 

How to make a Money Map that works in 7 steps

1. Think hard about what matters in your life

One study found the five most meaningful things in life for people are family, career, material well-being, friends and health. Can you relate?

What matters most to you? Being close to family. Relationships with friends. Financial security. Leading a sustainable lifestyle. Having kids. A successful career. Or work-life balance. Life-long learning. Giving back to the community. An Italian leather handbag (which is a work of fine art, I’m sure).

The most valuable things money can buy us are time and choice. Some of the most successful people in the world have gotten unbelievably wealthy by excelling at this and don’t work 60 hour weeks. 

You’ll be able to make decisions with more clarity if you know what your priorities are and how much they cost. You will end up saving more because you know exactly where to cut back on spending without cutting too close to the bone.

2. Track your actual income and expenses

Write your values and goals at the top of the spreadsheet. They will be there to greet you every time you open your Money Map.

Track three months’ worth of actual amounts you earned and spent. Your income should be your after-tax paycheck plus any income from investments, side-hustles or bank interest. Categorise spending into needs (essentials) and wants (discretionary). 

Subtract your expenses from income to get your net income.

The Money Map has two components.

  • Money flows
  • Money pools

This first part is about how your money flows.

Why three months? This has to be a sufficiently long interval to get an accurate picture of the money flows in your life. E.g. capture quarterly utility bills or car insurance expenses, get an average income figure if you have variable income, won’t be thrown off by unusual spending periods.

3. Calculate your “true” hourly wage

Write down your take-home / after-tax pay and divide it by all the time you spend working, as well as all the time and money you would have spent differently if you didn’t work (e.g. commute time, transport fees, cost of work clothes, therapy sessions if your job is stressful, and so on). 

Divide your actual income and expenses by your true hourly wage in the column next door. This converts dollars earned and spent into hours earned and spent. Let’s call this the time column. 

This little calculation allows us to capture true costs and the true value of your time. Economists call it the opportunity cost. It is the next best alternative foregone when you make a financial decision.

4. Ask, are you spending in line with your values and priorities?

Golden rule #1: Always spend less than you earn. 

The key to motivating yourself to do this is to track your spending and earning habits with real-time data. 

Look at your needs and wants expenditures. Cut the discretionary expenses that don’t bring you long-lasting joy or don’t nourish your soul in a wholesome way. Focus on the ones that do.

Now look at your time column. Does the conversion of your time into money into things make sense if you flip the equation? Is the luxury of renting a one bedroom apartment worth the extra 14 work hours every month versus flat-sharing plus two work days off?

Time → Money → Stuff


Stuff → Money → Time

Now look at the dollar value of your true hourly wage. Think about whether you are getting paid enough to feel acknowledged for the skill and effort you contribute in your job. Does your true hourly rate reflect this? Are you willing to upskill or get a side hustle to reach your financial goals faster?

It is not always easy to focus on an issue in our peripheral vision when we know staring too hard will make us squirm. It can be tempting to hide from the uncomfortable truths. But this step requires us to have an honest, non-judgemental conversation with ourselves.

We should not feel guilty or ashamed for reflecting on our financial priorities. I think of it as a mark of resilience and maturity. Be proud of yourself. 

Meaningless spending

The aim here is not to oppress your spending like a fascist dictator. There is no fun in financial abstinence. Nun at all.

Even overworking your self-control muscle in other parts of your life can make you prone to blowing the bottom out of your budget. This conversation isn’t limited to examining your discretionary spending. 

“You’ve got to address the root cause of what is compelling you to spend.

See, I value my physical health highly. We only get one body in this life.

On the other hand, I used to work in a high-pressure job that came with surges in workload around deadline season. I never imagined allowing work to become more important than my physical health. That would be like questioning my resolve.

Over time, I became accustomed to making short-term compromises in the name of relieving tomorrow’s workload so that I would have time then to tend to my health and fitness. It wasn’t even like I was saving lives. 

The ensuing grumpiness, guilt and self-blame for not being strong-willed to rebuff the pressures of work lead me to discovering the existence of the butternut cookie in aisle seven. 

The grocery bills didn’t show up as discretionary on my budget (I’m not that pedantic). We are obviously not crying over huge sums of money here. But the cookies were surely suppressing my gym ambitions. 

Somewhere along the line, my supposed devotion to my body as a temple got put on hold. 

Well, things eventually got better once I set clear, deliberate boundaries at work and joined Butternuts Anonymous. 

So ask yourself, what are the underlying emotions driving your purchase? What are you really trying to buy? 

Guilt, blowing off steam, FOMO, wanting social acceptance, or nurturing your sense of self worth in a healthy way, etc.

Helpful tips

  • Delay purchases, but define the delay period. For example, with online shopping, have it in your cart and resolve to purchase it in the morning. You’ll have a clearer head after a night’s sleep.
  • Ask whether it makes Present You happier than what Future You would be able to achieve if you used the money differently
  • Bounce it off your partner or close friend
  • Visualise how you would feel about the purchase a month after the fact

Prevention is better than cure. If scrolling through Instagram usually ends with a late night shopping cart check-out session (even though that wasn’t your intention), then try limiting your time on the app to divert post dinner shopping binges.

5. List everything you own and owe

The second part of your Money Map is understanding where your money pools.

This will give you a more comprehensive picture of your financial position than just income and expenses. It will also show how diversified your asset base is and where the bulk of your net worth is sitting.

Catalogue all of your assets

  • Share investments
  • Retirement funds
  • Property you own (at market price less sale costs)
  • Bank account balances
  • Cash
  • Stuff

What is “stuff”? All your physical possessions that you’d be able to sell on Facebook marketplace. 

Why document the “stuff”? To help you think twice the next time. To help you realise just how little that “stuff” is worth versus how many hours it cost you to buy. Then, to help you Marie Kondo the shit that does not spark of joy. Amen. 

I confess. I was an avid online shopper. I loved a good dopamine hit. But the Covid pandemic made me take a long, hard look at what I was doing with my money (it was scarce at the time, you see). Long story short, I have reformed my ways. I now refer to an inner moral compass as Buddha would speak of enlightenment. 

A great book to read on this is Your Money or Your Life by Vicki Robin and Joe Dominguez. 

You know, maybe those things aren’t so shiny anymore now that they’re not new?

Catalogue all of your liabilities

  • Credit card debt
  • Student loans
  • Home loans
  • Personal loans

Golden rule #2: Avoid bad debt. 

Bad debt is borrowed money that does not grow your net wealth. Like personal loans and credit card debt. Using borrowed money for personal consumption (i.e. to buy stuff) is one of the worst things you can do for your finances. Future You will not be thanking Present You.

Good debt is borrowed money that can be thought of as an investment in your future. Like mortgages on investment properties or student loans that enhance your future earning potential. 

The line between good and bad debt can sometimes be blurry. It all depends on the outcome. Your five year medicine degree is a waste of money if you ultimately end up as a life coach. Despite tax concessions on losses, such as negative gearing, your mortgage could do serious damage to your net worth if property prices fall or don’t rise as expected.

Calculate your net worth by subtracting the liabilities from assets

Net worth is the difference between what you own and what you owe, or how much money you would have if you sold everything you own and paid off all your debts. 

Your net worth is starting point A on your Money Map. Figuring out your net worth can also help you set goals for what you want to achieve with your money.It is not an exact number, because you will have to estimate the cash value of your assets even though we can’t say for certain what you would actually end up selling it for. In finance speak, we say the valuation of your assets includes unrealised gains.

6. Organise and automate your money buckets

First build an emergency fund

Build up sufficient savings to cover at least 3-6 months of expenses. If you haven’t got one, make this your top financial goal (non-negotiable). 

When in crisis, speed is of the essence. Your funds must be highly liquid, so keep them in cash. Keep it in a bank account you can easily access in your hour of need, but not easy that you would be tempted to dip into it for non-emergencies. Hopefully, you never get the chance to use it.

Prioritise this before paying down any bad debt, because you don’t want to have two crises on your hands at the same time (e.g. medical emergency and financial distress).

This is your safety net. Because life happens in unexpected ways. You don’t know you need one until you need one. It also prevents you from having to liquidate your share investments for quick cash, leaving them to grow uninterrupted.

Its third purpose is to provide psychological security. New research shows being in a financially insecure state imposed a “massive cognitive load” docking 13 points off people’s IQ scores.

Work out your money buckets

This is the bucketing system I use. Five buckets and four bank accounts. 

Bucket budgeting system
Five buckets and budgeting categories

* Hot tip! Set aside extra cash to provision for income tax if you expect an out-of-pocket tax bill at the end of the year. 

^ Eating out or takeaways. Basically anything you don’t cook yourself.

Again, if you applied the 50/30/20 rule, you would only have 20% of your take-home pay to feed both your “goals” and “invest” buckets. Treat those benchmarks as guardrails. 

Your own percentages will differ from these and differ from mine, because you need to base it off actual amounts, not budgeted amounts from someone else.

The brilliance of classifying them into broader blobs instead of applying categorical percentages is that this gives you the flexibility to mold the Money Map into your own. 

Now automate your money flows

Set-up automatic transfers to apportion your paycheck into your respective buckets. Putting this on auto is the key to removing your self-control out of the picture. 

I base the amounts on the monthly average of my past money flows. All of my automatic transfers are scheduled for the very next day after payday. I also set-up direct debits out of my Essentials bucket for the most important expenses (rent, utilities and insurance). That way, I feel I always have my own back. The rest of my essentials are paid when needed out of the same bank account.

For example:

automatic cashflow budgeting to buckets via direct debit system
Putting your cashflow on auto-pilot

Why is the investment bucket so important?

Golden rule #3: Earn income from assets, not your time. 

Formidable but simple. This is how you break the “time is money” formula. This is the secret.

Earning money from money is exponentially more powerful than earning money from time thanks to the magic of compound interest.

This is how people get rich. 

What is FIRE?

Financial Independence Retire Early (FIRE) is a movement that encourages people to save aggressively to retire early and live life on their own terms.

The classic brand of FIRE promotes frugality and an environmentally sustainable lifestyle. But the movement has branched out into sub-brands, such as Fat FIRE, Barista FIRE, and so on. These cater to different variations in retirement lifestyles.

There seems to be a common misconception that the sheer boredom of retiring early puts people off the idea altogether. It doesn’t always mean languishing as an unemployed bum till death. Most end up working on making the world a better place. Think volunteering or devoting your time to a worthy cause.

The concept was made famous by the Your Money or Your Life book I mentioned earlier. It also became popular with millennials through a blog by Mr. Money Mustache, who retired at 30 years old.

7. Update your Money Map regularly

Repeat Step 2 at least every three months or at regular intervals that make sense for you. Balance ease versus effectiveness.

I hear of many couples who do it about once a month. I used to do this every month, but ever since I aligned my spending to my values, I’ve actually ended up spending less in the first place. 

At first, it might feel like after-school detention (a Canadian survey reported people think choosing investments for retirement is more stressful than a trip to the dentist). But I found it gets easier the more you do it. 

Treat it like a post-game analysis session where you can’t wait to find out how you scored. Did you manage to hit your savings target for the month? Have you made a conscious value shift that is showing up in your spending habits?

Rework Steps 2 to 6 at least once a year. I come back to my Money Map to update my system every time there are changes (e.g. pay raise, move houses and rent changes, etc.)

Obviously, you can skip Step 1 if you’ve already reached enlightenment.

Key takeaways

Hopefully we can now agree that a “budget” is a little one dimensional for what we’re trying to achieve here. So I try avoiding the “B” word and call it a Money Map instead. My Money Map definitely has more tabs than a normal budget.

It is also said certain individuals show PTSD symptoms at the slightest mention of the “B” word or “S” word (spreadshit, as the Kiwis say). 

Building your Money Map is more nuanced. It places a broader emphasis on your net worth. It orchestrates your money flows and money pools towards your goals. It aligns with the three golden rules of spending less than you earn, avoiding personal debt and transitioning your income stream from your time to your assets.

Featured image: Karolina Grabowska

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