MakingCent$Meet

Bite the bullet, plan that family budget now

It can mean the difference between getting to enjoy retirement and having to scrimp during the silver years

When Invest Editor Lorna Tan asked me to write a personal column about how my husband and I planned a family budget when our son was born, I was stumped.

Frankly, we had done no such thing. My son just marked his first birthday last week and we are still a budget-less family.

That is not to say we spend carelessly and without thought to what we can afford.

My husband and I both spend within our means, pay our credit card bills in full and on time monthly, and have no debt besides our Housing Board mortgage.

We have never felt the need to demarcate who should pay for what. In our seven-plus years of marriage, we have not even set up a joint account. Sure, we've had our squabbles - I complain if he leaves the lights on in his study long after he's left the room as I pay for the utilities, and he retorts that he pays for our Internet connection, which we both use like our lives depend on it. Fair point.

CONSEQUENCES

The effects of not having proper family budgeting are not very visible in the short run. But once it's noticed or takes effect, it's usually either too late or too hard to change.

FINANCIAL ADVISER DAMIAN PANG, on the importance of proper family budgeting.

But the arguments have been few and far between and we've never felt the need to change our habits.

Since our son came into our lives, that hasn't changed. We roughly take turns paying for things - and, by the way, it baffles me how many things such a little child needs - and life goes on.

But having spoken to a few financial planners recently, I am starting to think that we should review our laissez-faire policy and work on planning a proper budget.

The trigger really came from financial adviser Damian Pang, who told me: "The effects of not having proper family budgeting are not very visible in the short run. But once it's noticed or takes effect, it's usually either too late or too hard to change." In the worst-case scenario, he warned, our lack of a proper family budget could lead to a compromised retirement for my husband and myself - having to scrimp during our silver years instead of enjoying the money earned and saved through our working lives.

We might also - horrors - become a financial burden to our child in future, who would have to grapple with his own financial worries in a world where inflation will likely outstrip income growth.

"It's a sad irony in many Singaporeans' lives that we have money but no time to enjoy when we're working and have lots of time but no money to enjoy when we grow old," Mr Pang said.

Mr Pang, by the way, became financially free by the time he was 32, by being extremely prudent with his earnings, and so now he works only out of interest and not because he needs to.

So he is in a good position to lecture people like me about our terrible money habits.

Now that he had scared me enough, what, I asked, should I do?

He gave me an eight-step plan:

First, list all your life's major needs and wants, and categorise them into three stages - short-term needs in the next five to 10 years, medium-term needs in the decade after that, and long-term needs 20 years down the road.

These would include things such as sending your child to university, or travelling at least once a year in your retirement.

Second, list the things that could possibly occur that will affect you financially, such as a retrenchment or medical emergency.

Third, estimate the amount you will need for each life stage, including some extra for those possible occurrences, and calculate your monthly cash flow surplus.

Fourth, match each stage with a financial instrument with a relevant timeframe, based on your risk profile.

Fifth, allocate your monthly cash flow surplus into each instrument.

Sixth - reality check.

"At this point, people will usually discover that they don't have enough money now to fund all these future desires and needs. For example, I might need to save up $150,000 for my child's education and I am comfortable with an endowment plan that averages 4 per cent returns a year, but I only have a budget of $100 a month to put towards it," Mr Pang said.

Which brings us to the seventh step - prioritise all the items in your list of life's needs and wants.

Finally, review the plan regularly over the years.

I have to admit this plan sounds daunting, but it certainly brings home the fact that our spending and investing habits today can have long-lasting consequences into our future.

Still, my husband and I will probably need to gather our energies to get started on this massive project.

In the meantime, SingCapital chief executive Alfred Chia has this rough and ready guide to spending wisely, which he calls the "4321" formula:

•Don't spend more than 40 per cent of your income on any kind of loans ;

• Don't spend more than 30 per cent of your income on any kind of expenses;

• Save at least 20 per cent of your income for major financial goals such as retirement, education or the down payment for a home purchase; and

• Spend at least 10 per cent of your income on insurance for protection.

Thankfully, my husband and I already live by these rules, so we're at least one step closer to being budget-wise.

Now, we have to get down to the task of listing out our life goals and setting aside the cash to meet those aims. Mr Chia warned that this can be an emotional undertaking.

He recalled a budget planning discussion he once sat in on, in which the wife plainly said she wanted the husband to contribute 100 per cent of the budget as his income was theirs to share while her income was hers alone to enjoy. No surprise, the couple ended up arguing over the issue.

While I don't share such a philosophy, I'm sure my husband and I will face some difficult discussions and strike some compromises as we work on our family budget. But at least, we'll do it with the knowledge that we are planning for the decades ahead together for our family.

A version of this article appeared in the print edition of The Sunday Times on March 27, 2016, with the headline 'Bite the bullet, plan that family budget now'. Print Edition | Subscribe