A good budget should allocate income for the following four main purposes.
(1) Charitable Purposes
Charitable purposes include:
- Relieving poverty, sickness or the needs of the aged
- Advancing education
- Advancing religion
- Other purposes beneficial to the community. Examples are charitable giving to the disabled and orphanage.
Muslims practice zakat giving. It is a 2.5% levy on most valuables and savings held for a full year if their total value is more than a basic minimum. In Christianity, a tithe paid as a contribution to the church. Traditionally it is one-tenth of income. Today, tithes are normally voluntary based on the concept of “freewill offerings”. Dana is the practice of cultivating generosity in Hinduism, Buddhism, Jainism and Sikhism.
There are also non-religious organizations that encourage charitable giving to help the needy. Examples are National Kidney Foundation, United Nations Children’s Fund and World Wildlife Fund.
(2) Emergency Fund
During an economy crisis, businessmen may suffer business loss and may lead to lay off employees to reduce expenses. Businessmen need time for their business recovery and employees need time to seek a new job.
An emergency fund is a fund built up to protect you from temporary short-term income loss. If you are employed, emergency fund equalizes your three to six months expenses should be sufficient. If you are on own business, you may need longer time for your business recovery. Thus, the fund should be able to cover your living expenses for more than six months.
An emergency fund should be highly liquid that allows quick access to it, which is vital in emergency situations. You may consider to save it in a fixed deposit account or low risk unit trust fund.
(3) Invest for Future
Future purposes could be:
- Retirement Planning
- Children tertiary education planning
- New car or property purchase
- Other luxuries
You must first identify your goals, followed by goals prioritizing, then find out what is your number for each goal. By understanding your personal investment risk appetite, set up your investment portfolio and plan for regular saving amount.
Warren Buffett says: “Do not save what is left after spending but spend what is left after saving.”
(4) Current Living Purposes
Current living expenses include:
- Tax payment
- Mortgage and hire purchase (not more than 30% of total income)
- Insurance premium (life, fire and auto insurance)
- Quit rent, electricity, water, television, telephone and internet bills
- Car maintenance, road tax, petrol, toll and parking fees
- Food, clothing and medical
- Expenses for children, parent and domestic maid
- Hobbies and Vacations
- Expenses for festive season, wedding, funeral and gifts