Set a monthly budget base that allows for the tax you will owe later.
A first budget often holds up for a year and then breaks down in the second. Most of the time the problem is the number it was built on. People tend to make one of three mistakes: they begin with the salary in their contract, they count on a bonus to make the sums work, or they put nothing aside for income tax. All three leave the budget looking balanced right up to the day a bill turns up that it never planned for.
Use your take-home pay as the base. This is the sum that is actually paid into your bank account each month, and it is smaller than the salary written in your contract. Part of the gap is your CPF contribution. That money is yours and it is real, but you can't use it for rent, groceries or your phone bill. If you plan around the contract figure, part of what you plan to spend will never reach you.
Take Hui Min, whose payslip you met in Lesson 2.1, "Every line on your payslip, from gross pay to take-home". Her contract says S$4,000 a month (an invented example). Once her CPF contribution and the self-help group deduction come off, S$3,198 reaches her account. A budget based on S$4,000 would have her spending S$802 a month that she doesn't get.
Some people's pay changes from month to month with overtime or allowances. If yours does, pick the lowest of your normal months as the base and count whatever comes in above it as extra.
As Lesson 2.1 pointed out, income tax is not taken from a resident employee's pay each month. IRAS (the Inland Revenue Authority of Singapore) works out the tax on one year's income during the year after. Either you file a return or your employer's records go to IRAS for you, and IRAS then issues a notice of assessment, the document stating how much tax you owe.
So the bill for your first year of earnings comes in your second year, when the money it relates to may already be gone. If you started work partway through a year, you may owe little or nothing for that first calendar year, since you earned less in it. Your first full year of work is the one that produces a proper bill.
Arjun, a young employee, finished a first year at work feeling fine about money. What went out was close to what came in, there were some savings, and the account never went overdrawn. Then, in the second year, IRAS wrote asking for an amount Arjun had put aside nowhere. Arjun paid in instalments with money meant for a trip, and it was months before things felt normal again. No single line of the budget had been badly wrong. The whole budget rested on the wrong starting number.
Whatever you will owe next year has to be found from what you earn this year, and a small amount put away each month makes that easy to manage. After the bill arrives, IRAS allows payment by GIRO in monthly instalments. This spreads the cost, provided the money is sitting there on each due date. Putting money aside from your first month of work is how you make sure it is.
Working out tax by hand isn't necessary. The IRAS website has a tax calculator for resident employees. You type in what you expect to earn over the year, counting any AWS or bonus, along with the reliefs you qualify for, and it applies the current rates and those reliefs for you. Relief for your own CPF contributions is one example. Others exist, such as relief for supporting your parents if you meet the conditions, and IRAS sets out each relief and its rules.
Hui Min expects to earn S$52,000 in her first full year. Her salary is S$4,000 a month for 12 months, which is S$48,000, and she gets one month of AWS, S$4,000. S$48,000 plus S$4,000 is S$52,000. With that entered, the calculator puts her yearly tax at about S$600. Divided by 12, that is S$50, which she moves aside every month. Her take-home of S$3,198 minus S$50 leaves S$3,148. This is her budget base, the amount her monthly budget is built on. When the actual bill comes, she pays it from the set-aside.
For your own figures:
Find your take-home pay, using your lowest normal month if it varies. Put your expected income for the year, AWS and bonus included, and your reliefs into the IRAS calculator to estimate the yearly bill. Divide that estimate by 12 to get your monthly tax set-aside. Take the set-aside away from your take-home pay. The amount left is what your monthly budget works from.
These days Arjun puts aside a monthly amount for tax, sized from the IRAS calculator instead of a guess. Of everything in Arjun's budget it is the dullest line, and the one Arjun is most glad to have.
AWS and bonuses are paid once or twice a year, with CPF taken off them. Lesson 1.2 showed that a bonus may turn out smaller than you hoped, or not be paid at all. A monthly budget that only adds up with bonus money in it doesn't add up, so plan each month on your monthly pay and nothing else.
On the day a bonus or AWS lands, decide what to do with it, splitting it between savings, a goal and spending. Lesson 7.2, "The raise rule: decide where the next increase goes before it arrives", sets out a rule for dividing it.
Keeping bonuses out of the monthly budget also protects your tax set-aside. Your tax estimate already includes bonuses as income. If the bonuses get spent inside the monthly budget, you have no money earmarked for the tax charged on them.
Your own version starts with two numbers: your take-home pay and your estimated yearly bill.
Work out your monthly take-home pay. Then use the IRAS calculator to estimate how much tax to set aside each month.
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