CREATING A BUDGET THAT WORKS


When the word “Budget” is thrown around in Nigeria, we almost always think about the state and national budget. Very few, think about the fact that that word applies to them. We recuse and excuse ourselves from the conversation. We blame others for not planning and how they have done this and that. Unfortunately, most of us are guilty of not budgeting.

We look at a budget as an inconvenience. “Why must I budget, after all, it is my money”. That is the mindset that is prevalent. This is a wide road that leads to unbalanced budgets, debts, loss of relationship and unhappiness. Remember the adage that those who fail to plan, plan to fail. Eric Tyson in his book “Personal Finance For Dummies” writes that “when most people hear the word budgeting, they think unpleasant thoughts — like those associated with dieting — and rightfully so. But budgeting can help you move from knowing how much you spend on various things to successfully reducing your spending”.

Creating your first budget can be extremely overwhelming. Statistics have it that only 40% of American families have a working monthly budget. But I tell ya, it is worth the effort. Developing a budget that you can work with over the long term has been definitively and causatively linked to building sustainable wealth while simultaneously helping you get out of debt, cut expenses and have control over your finances.

The slightest adjustments to your daily routines can dramatically alter the outcomes in your life— Darren Hardy

The data generated from your budget can help you to track your expenses, know what takes a chunk of your money and also see what can be taken out of your budget. Remember we live in an age where data is everything. Use your own data to your advantage.

A budget is a financial plan that takes income and expenses into account and provides estimates for how much you make and spend over a given period. A budget must be planned with your income and expenses in mind. Think of a budget as a very simple outlay of how you intend to spend what you have. If I have 10,000 Naira, it will be expedient of me to plan to work within the budget. That means something will make the list and some things will be left out. I know you want to go to Disneyland (it’s a good plan believe me) but the budget says you have 10,000 Naira. Plan and desire are not balancing out.

As you can see, our budget speaks to you. Going to Disney is great but your bank account of 10,000 Naira is speaking to you. That money cannot pay for plane ticket nor accommodation. Food and theme park tickets also have to be bought. It seems your bank balance is restraining your desire. There is always a constraint factor — which is the money available to you to spend. Having the money does not mean that you must spend it all. Let me outline some bits.

First and foremost, addressing your financial situation to determine where you are is critical. Are you in debt? Is there a big payout you need to do (rent, school fees, hospital bills etc)? Is all the money in your account yours or some is for your friends that you are keeping for them in trust? Just like accounting profit does mean that you have that cash at hand, the money in your account does not always mean it is yours. Keeping records helps to know what belongs to whom.

Distinguishing between needs (must haves) and wants (good to have) is an important first step before creating your budget. Your needs come first (rent, transportation to work, food, etc). The Practical Money Skills website states, “Acknowledging areas where you are overspending can be an eye-opening experience. Creating a budget and sticking to it can help you save and reach your short- and long-term financial goals. This is not a one-time exercise. Revisit and rework your budget if you have a financial windfall or setback so it reflects your current situation”.

I would always advise that one plans with the income that is steady. Planning with some unexpected windfall is ensuring that your budget fails. The other thing to do is to know what the component of your expenses is. You can use any formula you wish to adopt but you need to ensure that whatsoever you come up is implementable. Generally, your expenses should be made up of three components:

  • Fixed Expenses — These are expenses that stay the same from month to month, such as a mortgage, rent, utilities, health insurance, groceries (basic), childcare, religious obligations, transportation cost, etc.
  • Flexible Expenses are expenses that change from month to month. The expenses are yours to determine. This is where you have wiggle room to make changes to your budget. They are vacation cost, entertainment, dining, movies, travel cost, etc
  • Savings / Investment — A portion of your earnings should be targeted towards savings/investment. Ensure that you stick to this. The sole aim of saving is to build and strengthen a habit.

It is important to stick to what you have planned. A budget is not restrictive. Rather it gives you a liberating sense that you are in control of your finances.

Budget Misappropriation — this is a sin most of us commit almost every day. Basically, it means robbing Peter to pay Paul. The money required for fees should not be moved to entertain visitors. Rent money is not for religious activities. Money for religious activities is also not for personal upkeep. When you start staying within your budget and implement the “no budget, no spend” philosophy, you will be amazed at how disciplined you become within a short period of time.

Let me list a simple way to create a budget that works:

  1. Sit down and budget. It helps clear your mind. It makes you face facts. You have NGN20,000 and you think you can go to and fro Abuja from Lagos via a flight. Sitting down to think of it makes you realize that a better option given the funds you have might be to use public transport via the road.
  2. Write out everything that comes to mind. That act simplifies things. The act of writing things out has helped me tremendously. You exert some pressure on your thoughts when you write. You are forced to think.
  3. Plan. If you plan to be in the soccer world cup in Qatar in 2022, now is a better time to count the cost and see how you can save towards it. Put in that savings as part of your budget.
  4. Money must not send you on an errand. Any unexpected money should be kept away for a while, while you plan what to do with it. If you “jump” at the money, you will spend it without being able to account for it.
  5. Find out what your fixed, variable and savings/investment targets are. Work with them and make it work.

In our next write up, I will detail out more practical budgeting tips. See you then.

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