The word ‘Budget’ dates back to the 18th century. It originates from the old French word ‘Bougette’ which means a leather bag and gradually evolved to mean the content of a leather bag. Now, it has evolved to mean ‘A written document on how you intend to utilize your income’. A budget is a strategic plan on how your money will be apportioned to various specific wants and needs. Budgeting is the process of making a budget.
Budgets can be categorized into general and specific budgets. A specific budget is focused on a single expense or expense category such as a wedding, vacation, seminar, training or any other capital project. A general budget revolves around your routine as an individual or organisation.
IS BUDGETING NECESSARY?
All economic players have an inexhaustible list of needs and wants dependent on financial resources. These could range from going on a vacation, purchasing a luxurious car or your dream home, getting married, starting a company, running a company, expanding your business and even managing a national economy, etc. However, resources will always be limited and scarce. This reality necessitates a systematic method to achieve a financial balance, consequently being on the path of wealth creation and sustenance. Hence, budgeting becomes non-negotiable as it could help you adequately utilise your scarce resources in getting the things you desire and more in either the short or long run. In the words of Benjamin Franklin ‘By failing to prepare, you are preparing to fail.’
IMPORTANT STEPS TO TAKE IN BUDGETING
To successfully create a budget and get optimal results, it is important to consider the following fundamental steps.
- Have a defined time frame: A budget must be time-bound. It is usually done annually. It can also be further broken down into quarterly, monthly, weekly and daily budgets all in line with the annual budget (where one exists). Some companies even have budgets above a year. For an individual, a weekly or monthly budget will be more realistic and easier to maintain than an annual budget however, this is not to say an annual budget cannot be done.
- Identify and itemise your income sources according to your preferred timeline: For individuals under an employee contract, your disposable income (net salary excluding PAYE tax and other deductions) should be factored into your budget and used as the baseline for your budget.
- Identify and itemise your expenses: Make a comprehensive list of all your expenses e.g. rent, feeding, transportation, vehicle maintenance, electricity, groceries, hangout & relaxation, family support, charity, medicals, etc. To have a good idea of your expenses, track your expenses. You can download and review your bank statements for the last few months. Also, write down your daily cash transactions to have a complete view of your expenses. This will go a long way in your fund allocation per expense as it is based on your actual recent past expenses. Note that your expenses may differ per period hence, the usefulness of short-term budgets to accommodate variations per period.
- Crunch the numbers: Compare your income and expenses to know if your income can fully cover your expenses. In most cases, it may not but that is okay, the next stage is a solution.
- Use a scale of preference: Upon fully itemizing your expenses, separate them into needs and wants then, prioritize your needs over wants.
- Cut back where necessary: In budgeting, being realistic is equally as important as prudency. Do not hesitate to cut back on the allocations for certain expenses to accommodate others.
- Stick to your budget: This step is the most important step of all and requires financial discipline. Although we do not advise excessive rigidity in the face of a daunting reality or seizing an opportunity, we advise you avoid making contravening your budget a habit.
- Monitor your expenses in line with your budget: Expense tracking also comes to play here. Continue tracking your daily expenses. You may have a spreadsheet where you compare your actual vs. budgeted expenditure. This will help you determine the realisticity of your present budget, note areas where changes are required and plan towards your next period’s budget.
KEY TIPS & TAKEAWAYS
- Never underestimate creating a budget. It helps you in knowing and understanding your financial capacity. You cannot grow what you do not understand.
- Expense tracking is key in budgeting for realistic fund allocation and expenditure monitoring.
- A scale of preference is important. Learning to prioritize is a fundamental financial skill.
- You can objectively explore debt financing when you have a budget however, we cannot stress enough that the most ideal use of debt is for expenses that are capital in nature and not recurring ones.
- Budgeting for savings/emergency funds must always be a top priority as well as budgeting for charity.
- Fund must also be carved out in your budget for investments after an emergency fund has been created.
- Where you do not have an emergency fund, ensure there is an allowance in your budget for ‘Unexpected Expenses’.
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Thank you for reading and look out for our next articles on budgeting for SMEs in the coming weeks!
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