How to Budget and Save More of Your Money: A Guide for Muslims Without the Interest
What is a budget?
You may be asking yourself what is a budget? A budget in simple terms is a plan for your money. We have all heard the saying - if you fail to plan, you plan to fail. John Maxwell said it best when he said a budget is simply telling your money where to go instead of wondering where it went. That is all great in theory but what about the practicality?
As a Muslim, we know the effects of utilizing interest when dealing with our finances. But living in this day and age in more modern countries around the world, it is almost impossible to achieve big purchases without dealing with interest. Credit cards, student loans, and mortgages are just three obvious things that come with interest and it is hard to find ways around it at times.
To help find halal ways to save more of your money practically are hard to find online. We created this blog post to help find you ways to save effectively and spend your money wisely no matter where you are in your financial journey.
Establish your budget:
In this blog, we will show you how to do a real budget with real numbers that goes beyond the philosophy and involves real-life application. In practical terms, budget means sitting down every single month to determine your income; what amount of money is coming in and when is it coming in; and taking a look at every single expense from your rent or your mortgage all the way down to your daily trip through the drive-through for that morning cup of coffee. You need to know how much your expenses are and when those expenses need to be paid.
So, let's not just talk about it and let me show you how it is done.
Create a worksheet
First step: set up a template. You can use Google Spreadsheets for your monthly budget. You can also use Excel, or simply draw one on a piece of paper.
There are three rules for budgeting, in no particular order:
- Assign every single dollar and penny to a column
- Set up automatic withdrawals for the fixed or regular monthly bills
While setting your personalized budget, be sure to cover every category of income and expenses in greater detail. It’s important to know EXACTLY how much money we have coming in when it is coming in. Make the categories as personal to you as possible so there aren’t too many things in the miscellaneous column or category.
Prioritize your expenses
It is so important to list your expenses in the order of priority. If you don't prioritize things like food or gas for the car, you’ll find yourself dipping into funds that aren’t really yours – aka credit cards.
To prioritize your expenses, take a look at your necessities and differentiate them from non-necessities; needs vs wants. A few examples of needs include rent or mortgage payments, groceries, toiletries, and medication. Next, are some more necessities like utilities and transportation. Alternatively, non-necessities or wants are items that we don’t absolutely require but they are nice to have around, for instance, a new car, better furniture, home décor items, jewellery or antique artwork etc.
Look for unusual items
Take a look at the miscellaneous category and determine if there is anything special happening in the month that you need to shop for? Is there a birthday or an anniversary coming up, or a holiday that you need to prepare for? These items can go under the miscellaneous category because they aren’t repeating items every month. You can also further breakdown this category into columns such as gifts, birthdays, anniversary, etc.
Adopt the 50/30/20 rule
Follow 50/30/20 rule proposed by Senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan”. Her basic rule is that at the time of budgeting and personal financial planning, you should allocate 50% of your income to basic necessities, 30% of it to your wants or luxuries and 20% of income should be saved for future purposes.
“Save money and money will save you”
Once you budget all your income and expenses, the next step is to saving money. It can be very difficult to actually save the money that has no real category and we often misinterpret that as money that can be used for any purpose.
Taking the leftover funds you have after the fixed items on your budget have been paid and putting them into a savings account, you can The process of thinking about it can be easy but actually doing it and seeing that money in your account piling up can be much more difficult.
Pre-requisites for saving money
Dave Ramsey has a golden rule when it comes to saving money. His very first step is to have an emergency fund of at least $1000. He also encourages paying off all your debts prior to saving anything else.
There are a couple of initial things that you do before considering saving money:
- Set overall broad goals to understand where you want to be 6 months from now, 5 years from now and 20 years from now. Have a general idea of the amount of money you want to save. Do you want to buy or upgrade to a new vehicle or are you saving money to pay for family vacations? Do you want to save money towards a down payment on a home or do you just want to have a nice cushion of cash saved up so that you are not struggling to pay your bills? Deciding on a ballpark range of how much you want to save and setting that goal is important to know what future plans you have and how serious you have to be about saving money in order to reach those goals.
- Secondly, create more specific goals. You already have those initial goals of where you want to stand financially years from now, but then you need to set these secondary and short-term goals. This step is more personable and depends on your income so be realistic with yourself. Start with small amounts and then expand as you go or as you get more experienced with budgeting and making smarter financial decisions.
Saving money from necessities
There are five different essential needs everyone has that are very important to take note of when determining your categories in your monthly expense list. They are food, shelter, health, clothing, and transportation. Even though these are needs we cannot ignore, there are great and helpful ways to cut back on these expenses.
Food - is one of the most depreciating assets you could ever imagine. This means that if you spend $20 on a meal; you eat the meal, and there is nothing left on your plate. Albeit you are full or satiated for a couple of hours, as humans we have to eat again to maintain ourselves. Reducing your monthly expense on food can be extremely effective on your ability to save more money monthly. There are various ways to do this:
- Meal prep numerous meals for work or events
- Make your own coffee/tea/refreshments at home
- Buy canned and non-perishable foods to extend the expiration date and shelf-life
- Buy store brand products and avoid the commercial brands if there are cheaper alternatives with the same or similar ingredients
- Reduce the number of meals you eat at restaurants or for take out
Bonus tip: Buying frozen fruits and vegetables can further extend the expiration date of food that can easily go bad if they are not consumed.
Shelter - the cost of shelter is difficult to avoid. One of the best ways to cut the cost of your apartment or your house in half is to get a roommate or consider renting out a room in your home. There are now apps and services such as Airbnb or couch surfing. You can also cut the cost of living for yourself by reducing your utility usage or getting a lower rate on your WiFi. You could look into various companies that are offering similar products and shop around a little bit more and just because you have been using the same provider for the past 10 years, it doesn't mean that you should not look into getting a different one. Ramit Sethi has great negotiation tactics for reducing your bill payments and they have been proven to be highly effective.
Health - health is incredibly important and the best way to cut back on this is to make sure you are treating your body well. Good health is good wealth, and bad health lifestyles can cause an increase in medical bills that can potentially be avoided. Of course, we know that some illness and diagnoses cannot be avoided. However doing our part in keeping our health as a priority and avoiding eating or doing activities that can cause harm, we can potentially avoid health risks.
Clothing – The best way to cut back on the cost of clothing is to unsubscribe from all the emails from clothing providers that are spamming you with sales and discounts that you do not need at the present time! Email marketing is very effective and can influence you to buy unnecessary clothes they don’t really need. When you do need to purchase a new pair of jeans, trust me, you will know!
If you are on the market for a new clothing item such as a sweater or jacket, however, and are on a tight budget or low on funds that are not being utilized for fixed expenses, there are great and various finds at thrift stores like Goodwill or the Salvation Army.
Transportation - The average cost of operating and owning a vehicle is close to about $9,000 per year. If you live in an urban or even a suburban area, where there is some type of public transportation available, you might want to consider whether or not it is actually worth it for you to own a vehicle and how much you are using that vehicle versus taking public transportation. Most major cities have monthly passes that provide unlimited public transportation use. In some cities, it is actually cheaper to either Uber or Lyft to work and back rather than having your own vehicle to maintain.
Creating a budget is a great useful option to help provide financial stability and stay up to date with your current fixed expenses. It can also aid in knowing how much money per month you can put towards any goals or major purchases you would like to have. Saving more money can provide a financial cushion against any uncertainty in life and creates a feeling of security. Following the above easy steps can give you peace of mind and be closer to financial freedom.