Budgeting is an aspect of Personal Finance that literally makes people shiver in fear? This is because it forces people to face the reality of their finances, and only the courageous can do that. Hence, people usually neglect it altogether. For this reason, I will not go into the “boring” intricacies and technicalities of budgeting – the part that scares people. I will keep this as simple and interesting as possible. My aim is to help you understand your need for a simple budget for your personal finance.
WHAT IS A BUDGET?
A budget is an itemized summary of intended expenditure coupled with expected revenue for a length of time. Simply put, it is an estimate of income and expenditure for a period. Cambridge dictionary defines it as “A plan to show how much money a person or organization will earn and how much they will need or be able to spend.” You may define it as “A list of all planned income and expenses, a plan for saving and spending for the near future.” From the definitions above, you can see that a budget is not something you create off-hand. It ought to be a written plan (on a piece of paper or PC).
WHO NEEDS A BUDGET?
There are different types of budgets for different people and situations. A budget can be created for an individual, a household, a business, an NGO, a State, a Nation, etc. Wherever a person or a group of persons make use of money on a regular basis, there is a need for a budget.
TYPES OF BUDGET
A simple Google search will give you many kinds of budget, making you more confused. However, I have classified budgets into 3 types, namely:
PERSONAL BUDGET – For individuals, families and households.
BUSINESS BUDGET – For NGOs, SMEs and companies.
ADMINISTRATIVE BUDGET – For schools, churches, LGAs, states, nations and other administrative systems.
Also, budgets could be classified as SURPLUS, DEFICIT or BALANCED.
It is a SURPLUS Budget when your income exceeds your expenditure for a set period. This should be everyone’s financial goal. This implies that there is more money for savings, investment and other things you want.
It is a DEFICIT Budget when your expenditure exceeds your income. Unfortunately, this is the situation many people find themselves in. They always run out of money to fund their expenses. This calls for a red alert as radical measures must be taken to remedy this situation. You need not worry though. You will know how to solve this problem by the time you are done reading this article.
Lastly, a Budget is BALANCED when your income equals your expenses.
WHY YOU NEED A BUDGET FOR 2021
I could list a thousand and one reasons why you need a budget. You might even know more. You may have learnt them in your Accounting or Economics class in Secondary School and may have attempted questions on them in your final external examinations (WAEC, NECO or JAMB). But what stops you from implementing them? Lol.
Perhaps, the most important reason you need a budget is that “Human wants are unlimited while the resources to meet them are scarce.” Sounds familiar, right? Yes, this is what you were taught in Economics. In addition, there are a lot of things, people and circumstances competing for your money. They want to take it away from you however they can – legally or illegally (Ask the victims of failed Ponzi schemes?).
Unless you create a budget, which is basically a PLAN on how you want to spend your money, it is easy for these “human wants” to take your money away and leave you in poverty. If you experience the frustrations of not having enough for the things you need or begging for the necessities of life, you will realize you need a budget. I hope you don’t get to this point. Instead, realize that a budget is critical to financial control.
In summary, having a budget is important because it ensures that you have enough for the things you need (and things that are important to you) however and whenever you need them.
KEY ELEMENTS OF A BUDGET
When drafting a budget, there are certain things you must take into consideration, namely:
INCOME: This is the amount of money that comes in weekly or monthly. This includes all your sources of money – both passive and active income.
FIXED EXPENSES – These are the expenses that don’t change easily as they are paid regularly (monthly). Examples are rent, insurance premiums, taxes, debt payments, interest payment on a loan, child support, etc.
PERIODIC EXPENSES – These are expenses that are less frequent. They come in periodically or unexpectedly. Examples are car repairs, home maintenance, gifts, appliance repair, loans, etc.
VARIABLE EXPENSES – These include every other thing that you need for daily living. They are called “Variable” because they vary from time to time. They include food, utilities, phone bills, TV subscription, gas, fuel for car and generator, clothing, education, medical bills, transportation, entertainment, name them. They are usually the most difficult category of expenses to track because they fluctuate a lot. When trying to fix your deficit budget, variable expenses are usually the first place to start trimming.
HOW TO DRAFT A SIMPLE BUDGET MASTERPLAN
In other to draft a budget successfully, you will need some basic tools, namely:
Notebook or PC
STEPS TO CREATE A BUDGET THAT WORKS FOR YOU
DETERMINE YOUR PRIORITIES: To be frank, even if you were given all the money in the world, you would still wish for a million things. So, since your income is limited, you should arrange your needs and wants in order of importance.
HAVE A GOAL: Once you know your priorities, set financial goals and deadlines for each goal. When you define your goals (What are you saving for?), your amounts (How much do you need to save?), your deadlines (When do you need that money?), you can create a budget – a roadmap – to achieve your goals.
CREATE A LIST: Write down and categorize all your expected income and expenses in vertical order of importance. Don’t forget to divide them into Fixed, Variable and Periodic Expenses.
HAVE A PLAN: After creating the list, you need to have or create a plan, that is, determine how you intend to meet your needs and what percentage of your income you will allocate to each need.
CALCULATE: This is the stage where you have to apply basic arithmetic. Calculate the real figures and determine how much you need to allocate for each expense. Wherever you get stuck, use a calculator. In the end, you should have a lot of figures.
EXECUTE: Finally, get into action. You aim should be to spend exactly or below what you have budgeted.
HOW TO STICK TO YOUR BUDGET MASTERPLAN
The thought of sticking to your 2021 budget from January to December should not give you goosebumps. Simply follow these guidelines:
Place your budget somewhere you can see every day.
When you feel like giving up, remind yourself why you created the budget in the first place.
Most importantly, have an accountability partner – someone to hold you accountable for the way you spend your money. If you’re married, your spouse can be your accountability partner. If you aren’t, your best friend, pastor, parents or anyone you can trust can be your accountability partner. Better still, you may join my SBM Program to have an experienced Financial Intelligence Coach as your accountability partner.
In summary, taking charge of your finances in 2021 begins with having a Savings and Budget Masterplan. Now that you have learned how to create these plans, it is time to put your knowledge to work so that 2021 will be a remarkable year for you.
N/B: This article is an excerpt from a webinar which was first published on my Facebook community – Financial Intelligence Forum (FiFo). Join the community to access my past and future publications.