Odunayo Adeniji

odunjoy.adeniji@gmail.com

Many people are of the opinion that budgeting could stifle you from enjoying what you love. This notion is far from being true. In fact, personal budgeting is one of the easiest ways create and attain your future goals. Budgeting allows you set your priorities straight and allocate your money on things that align with your

future goals.

To get ahead in life, it is quite imperative to think, plan, and prepare ahead of the future. He who aims at nothing will never miss!

In many organizations (businesses or governments), preparing a budget is a major activity. Sometimes, weeks and months roll by as the process is coordinated towards producing for approval, a master budget that will be executed in a future period. As preparing and executing a budget is critical to any worthwhile venture,

same applies for individuals with goals and aspirations to attain financial freedom.

Budgeting and Budget

Budgeting is the process required to create a budget, otherwise referred to as a spending plan. A budget is a statement of estimated income and expenses for a set period of time, based on future plans and objectives.

A budget acts as a financial navigator towards achieving set goal(s). Therefore, having one or more goals is the trigger for planning and budgeting.

When planning, clear objectives are set with the means for their attainment defined. A budget usually covers all the activities involved in achieving your set objectives. It ensures that there is a link between your short, medium or long term goals and the strategies to adopt in achieving those set goals.

Income versus Expenses

In creating a personal budget, the easiest way to start is by clearly identifying your money inflows and outflows. Your money flow should be understood and mastered by tracking down your expenses, as well as your income sources.

Income

Your income sources are almost certain, and this can be tracked with ease. While some people have a single source of income, others have theirs flowing in from several sources. They may include salary, interests on savings or fixed deposits, dividends from investments, rent from estate, commissions, profits from side

hustles etc. A growing annual income might be an indication that your skill set as well as your experience on the job is improving, hence, your improved earnings.

Expenses

Expenditure according to Wikipedia, is an outflow of money, or any form of fortune in general, to another person or group to pay for an item or service, or for a category of costs. There are budgeted and unbudgeted expenses. There is therefore the need to take a closer and firmer look at where your money has been going till date.

When income surpasses expenses, one is said to be in a safe zone. The only problem is, it is quite harder to keep expenses down. Therefore, spending choices have to be made cautiously and sensibly. You may never appreciate the money that flows out through your hands on a weekly or monthly basis until you begin to

track your expenses!

Expense Tracking

A great way to track your regular monthly expenses is to make a list of your expenses for three (3) consecutive months. This list should include all money spent within this period. A review of your bank statements, credit card statements, cheque stubs, bills and receipts will help identify both your inflows and outflows over these months. Be mindful to add non-routine/occasional expenses (like car maintenance, gifts to friends and charity within the period

under review.

Expenses Categorization

Once your monthly expenses have been identified, create categories in which related expenses may be grouped. There are various categorization methods that may be adopted. You may fix your expenses under categories such as:

A. Fixed Expenses: These are expenses which remains static over time. They include rent or mortgage, loan repayments, club membership fees, etc.

Variable Expenses: These are regular expenses but without a fixed cost. Expenses in this category can be easily tweaked unlike its fixed counterparts. They include food, vacation, entertainment, and utilities.

B. Discretionary Expenses: These expenses are not absolutely necessary for survival as you can do without spending on them. They include club membership, entertainment, vacations, luxury items, etc.

Non-Discretionary Expenses: These are unavoidable costs. You just have to spend money on these items of cost. They include rent or mortgage, food, utilities, transportation, and loan repayments.

C. Routine Expenses: These are recurrent costs and they take up a higher percentage of your total monthly expenses. They include taxes, rent or mortgage, debt, savings, transportation, food, entertainment, insurance, etc.

Non-Routine Expenses: This may include occasional expenses like car maintenance, gifts to charity, Christmas, birthday or other anniversary gifts you buy for family or friends.

Having identified and categorized your expenses, they are better defined and understood. You may find that some expense heads fit into more than one category. For example, rent and loan repayment are both classified as fixed and non-discretionary expenses. A certain portion of your net salary must be set aside to settle these costs monthly.

Also, club membership would be categorized as fixed and discretionary expenses, while entertainment would appear as variable and discretionary expenses while food and utilities would be categorized as variable and non-discretionary expenses.

Cutting Costs and Budget Flexibility

Categorization makes it easier to set your priorities right and control expenses. To reduce total expenses, you may cut back on entertainment (being a variable and discretional expense). Club membership is also fixed and discretional. It may be removed or substituted for with a cheaper club membership. Since food and

utilities are non-discretional but variable, these costs may also be tweaked in terms of quantity and quality (buying cheaper brands) to save costs.

When preparing a budget, flexibility should be considered. Sometimes, unforeseen circumstances creep in to tilt initial plans toward either becoming unattainable or unsustainable. If this happens, it becomes essential to call for a review of the entire budgeting process. This is why a monthly budget review should be embraced.

Spending Percentage

A spending percentage is the portion of your total income allocated to distinct expense heads like tax, rent, food or utilities. A popular budget percentage is the 50/30/20 rule.

As a general rule, it is thought that 50% of your net income (after tax) should be spent on your needs (must haves), 30% on wants (should haves), and the remaining 20% on savings and investments.

To calculate your spending percentage on an expense head (say transportation), add up all expenses relating to transportation for a month. Divide this total cost by your total income for the selected month and multiply by 100. The result will equal your spending percentage for such an expense head.

For example, if you earn $2000 per month and spend $200 on transportation monthly. Your transportation cost percentage will be 10% (i.e. $200/$2000) x 100.

Conclusion

Tracking your expenses will reveal your spending pattern, financial habits and lifestyle. Being able to meet your financial obligations when due, and as well set aside money towards savings and investments, or the inability to do all these is the result of habitual spending patterns.

Creating a budget may be demanding, spending without one may be far worse. Good or bad, habits are formed. Managing your financial outcomes by creating and executing your budget is up to you.