This, my friend, is the simplest and happiest solution you’ll ever have to employ over the lifetime of your career.
How are you doing? With myself already more or less adapted to the life of a soldier, I was asked this question by my ex-colleague through whatsapp. (That’s why everyone should have at least one financial blogger as a friend- to get free financial consulting lol) This question almost made me pull out all of my hair, but fortunately, I didn’t have much after shaving just 2 weeks ago for $2 at Pulau Tekong..
I understand that most of you are longing for that pay raise coming this Year of Sheep. However the debate never ends on whether if you should channel that 4% raise monthly straight into your savings account or just budget the well-deserved sum into your monthly spendings. The latter option is assuming you’re a mid-financial-savvy guy with the habit of saving up your annual bonuses in your blood, plus a savings target planned out.
Personally for me, not being able to touch that raise makes me feel remorseful for not living to the fullest and taking care of myself, but on the other hand channelling them into my monthly spending budget seems a little too lenient to my plans for my future.. (Hey if you could show me saving up those pay raises would make me a millionaire a decade faster, I would definitely do it man! Who won’t?!)
Sure, the extreme-financial-stressedout-freak with his extreme-savings-plan enabled will surely swear that the best thing to do for your future is to channel 80% of your pay plus every cents from your commissions, allowances, claims, compensations, increments, and bonuses into your savings or investments..
But will you be comfortable doing that for at least 5-10 years? No eating out, no family gathering, no chilling out with friends? Really? And not feeling a sense of remorse when you look back later? If you think you will be, I’m happy for you! Because you will be a happy and a wealthy man in a jiffy! (Though I’ll admit you’re a little weird once you’re not looking)
So what is the happy solution that lies in the middle of the two sheer options? Let me present to you the simplest solution of them all:
The holy Annual Budget Rebalancing
As the name says it, it is the holy grail between untouching and touching it, basically.
But on a serious note, it works just like how you maintain a portfolio that has deviated away from your original asset allocation back into line. If you can rebalance your portfolio annually, why can’t you do the same to your budget? If Singapore Government can work on a Singapore Budget 2015, why can’t you do that too? (Okay, doesn’t really link but you see where I’m going right)
So looking into my approx. $2,000 salary budget that I’ve got last year, an increment of 4% of my pay will affect my allocations as follow:
|Before 4% raise||After 4% raise|
|Allowances to parents||$400||$416|
The good thing for this is that you’ll increase your spendings budget along to ease yourself with the inflation while also saving more than you did last year. (What a sense of accomplishment year after year! 🙂 )
This, my friend, is the simplest and happiest solution you’ll ever have to employ over the lifetime of your career. And of course, I hope it won’t be long before you’re out of the rat race 😉
On a side note, I have always supported the idea that bonuses should be directly channelled into your savings account. If you can live without it for 11 months, why not this one month too?
If you really want to purchase something so expensive that it can’t fit into your monthly budget, I highly recommend the method of opening an additional savings account for channelling additional savings on top of the first savings account. This way, you kill four birds with one stone:
1. Your saving goals are still met
2. You will automatically work doubly hard (even taking up part time job) to fund that purchase you are dying for
3. It will make you appreciate it even more once you get your hands on it
4. You will go through the ‘waiting phase’ of big purchase, which is the days you relook into your financial position and your needs. Do you really need this?
* Take note of the minimum account balance fines when consider opening a new savings account.
If you’re planning any big purchase this year, either an exotic vacation to the Cook Islands or your first Mercedes-Benz, you might be interested to read this article by Trent Hamm, Author of The Simple Dollar: Saving For Large Purchases Without Killing Your Budget
Meanwhile, I wish for you a great pay raise coming this Year of Goat and a very Happy Chinese New Year 新年快乐!
(Enjoy it.. Know that I won’t be having any raise soon while being stuck in Sungei Gedong Camp 🙄 )
The Independent Abecedarian