I’ve seen many people struggle with basic budgeting, even high-income earners! Buying that RM23,000 Hermes Birkin bag and the limited-edition RM32,000 Nike Yeezy 2 Red October sneakers for your collection is likely to be detrimental to your long-term financial freedom goals.
One thing that gets many people is lifestyle creep. What is lifestyle creep?
Lifestyle creep, also known as lifestyle inflation, is when your expenses or spending go up as your discretionary income increases.
We all hope for that large, fat bonus and generous increment for our hard work during the year. However, as your income increases, your list of wants (not needs) will also expand. Take me for example: I’ve always found it liberating to go without a watch. However, as of late, I’ve started browsing websites of luxury timepieces with an eye towards getting one. 😅
It has come to the point that Facebook has started exclusively showing me ads from Rolex, Patek Philippe and Omega!
It takes massive willpower to avoid lifestyle creep, especially if you think you “deserve it”. One way to start is to have a strict budgeting plan in place! Here are 5 tips for budgeting everyone should know:
1. Pay off all your debt first
Do you have credit card debt? Or a personal loan? Take care of that first! There are two approached – Debt Snowball and Debt Avalanche. They differ over which debt you single out first but both are effective. Just like dieting, choose the method which works for you (the one you can stick to).
Debt Snowball Method
Settle your smallest debt first and wipe it out. Then go on to the second smallest and repeat till all your debt is gone.
– Builds motivation as you see progress early
– Easy to follow
– More expensive as you pay more interest
Use the Debt Snowball Method if you lack motivation. Once you start seeing progress, you’ll be driven to settle even more of your debt.
Debt Avalanche Method
Tackle your highest interest debt first followed by the second highest so you pay less interest charges overall.
– Minimize the amount of interest you pay
– Needs discipline and commitment to follow
Use the Debt Avalanche Method if you want the most value. Paying less interest is a good thing but please make sure you commit to this path as you won’t see fast results at first.
2. Practice living on less
Can you be happy with less? Of course! Choosing to be happy with “enough” is an important life skill. You don’t need to splurge on expensive restaurants, drive the latest car, and wear designer clothes to be happy. Lifestyle creep is something you must avoid to achieve financial freedom.
Savings and investments come first. Realign your mind to be happy when you see your investments growing instead of needing consumption to attain happiness. I look forward to “spending” on investments like stocks, crypto, ETFs and gain immense satisfaction from seeing my profits.
3. Budget to zero every month
This doesn’t mean that your bank account must reflect RM0 at the end of the month. It just means every ringgit must be accounted for! Calculate your monthly income (salary, side hustle etc) and take care of your fixed expenses first (rent, bills etc).
Then invest first! Allocate an amount which you will invest every month and stick to it. Of course, you also need a small fund for splurging but make sure you budget for it last. You’ll find that having less discretionary means you delay lifestyle creep for longer.
4. Track your progress
Using a budgeting tool is very important so you can track your expenses and investments. This doesn’t need to be fancy or expensive – I use Google Sheets! One of my ex-bosses was fond of riding anyone who doesn’t have the relevant numbers (be it sales figures or cost of Facebook ads) on hand. Woe be him who says “give me a second to check”. He is a firm believer that as a manager, you should MEMORIZE those real-time figures. It should be BURNED INTO YOUR MIND.
And you know what? I agree. Do this to your budgeting and expenses. Be very aware about how much you’re spending and where you are TODAY with regards to your monthly budget. Are you overspending? Then make adjustments now.
5. Cut yourself some slack
That said we’re all human and it’s natural to slip up now and then. We’re not robots who executes plans perfectly each time. Don’t be too hard on yourself if you spend a little bit more this month. Just tweak your budget for next month to accommodate for that and move on.
Budgeting is like dieting. Follow through consistently and forgive yourself if you occasionally slip up. If you gain 1kg from a feast with friends one weekend, don’t lose hope and stop dieting. Adjust your meals the next week to get back on track.
It’s the same thing with budgeting. Look at the big picture – have you achieved your goals when viewed on a yearly scale?
If so, congratulations! You’ve mastered budgeting.