Budgeting refers to the way you monitor your expenses with a view to ensuring financial independence. Budgeting simply means a written plan of how you intend to spend your money, be it on daily, weekly, monthly or yearly basis. It is however recommended that set your budget on monthly and yearly bases. Budgeting on a monthly on yearly bases helps you manage your expenses well.
Why is Budgeting so Important
You cannot truly attain financial freedom without budgeting. Budgeting helps you keep track of your finances; it helps you determine how your income will be spent based on your scale of preference. Budgeting is a foundational principle of wealth creation, without which one cannot truly build wealth.
Types of Budget
There are different strategies when it comes to budgeting designed to ease your budgeting experience especially for first timers. Every person is different and one strategy may work better for you than another. Exploring the different strategies can help you determine the best budgeting strategy for your personal situation.
- 5-Category Budget: This requires setting up five basic categories and determining the percentage that you should spend on each. For housing, you can spend up to 35 percent of your income. For transportation, you should plan to allocate no more than 15 percent of your income. For other living expenses (such as groceries, utilities, and wants), you can spend up to 25 percent of your income. For savings, set aside 10 percent each month. The last category is debt payoff, and it should comprise15 percent of your income.
- Envelope Budget: This is a budget where you divide your expenses into categories and then assign money to each category, such that you only deal with cash for most of your expenses. You take the cash out for each month and put the money into different envelopes labeled for the category. When you run out of money in that category, you stop spending. This is a good strategy if you are not good at tracking your expenses. To make this work, you must learn to discipline yourself not to use your credit or debit card for any of the covered category of expenditure. I must not fail to inform you that it is difficult to adhere to this at the beginning, but you must put in discipline required if you wish to improve your finances.
- Zero Budget: A zero budget encompasses planning how you are going to spend your income down to the last penny. This budgeting theory helps you to plan effectively and get control of your spending. This budgeting technique helps you to monitor your expenses regularly and also helps you to attain your savings goals since it is savings centric.
- 50/30/20 Budget: This helps you determine how much you should be spending on different categories. It can help you focus more on your financial goals. According to the 50/30/20 principle, fifty percent of your income is to be spent on your needs. The needs are things like basic food (this does not include eating out), housing, transportation costs, and utilities. Thirty percent of your income is to be spent on your wants. This includes your entertainment costs, eating out, gym or club memberships, subscriptions etc. Twenty percent should be spent on savings and debt repayment. The savings can include things for your goals like buying land, house or retirement.
How to Set Up Your Budget
Setting up a budget is a straightforward but mostly daunting process for first timers. It helps to list out your expenses each month as well as your expected income. If you have not budgeted before, you can start by looking at your past three or four-month’s expenses and use that information to categorize your expenses and then build your budget on the bases of those categories. The following will aid you in the process:
- A good way to begin is to take an inventory of all sources of income, ranging from salary if you are on a paid job, to money generated through side hustles as well as gifts and freebies. If you have a business, you should include the amount that you pay yourself out of the business each month.
- List your expenses starting with the most important to the least important. Listing the expenses in order makes it easier to make cuts in your budget if needed. The most important should be things that cover your necessities. You will need to cover your housing, food, utilities (excluding cable and data subscription, unless they are necessities depending on what you do), transportation costs, debt payments, and savings goals first. Then you will list luxury items that can include clothing, entertainment, eating out, and gym or club memberships.
- Once you have a list of your expenses and your income, you will need to compare the two numbers. Your expenses should be less than or equal to your income. If you have additional money after you plan your budget, you can add it to the categories for your financial goals like getting out of debt or building an emergency fund. If you have more expenses than income, you will need to find ways to cut back on your expenses. Start by cutting money from the category that covers the luxury section of your budget. You can also work on ways to increase the amount you earn.
- You will need to track your spending and stop when you have reached the limit in each category. This is when you start budgeting. If you do not stick to your categories, then you will not stick to your budget. If you end up spending more in one category than you had planned, you can transfer money into that category to cover it from another category. For example, if you budgeted 20,000 Naira for food for one month and you ended up spending 25,000 Naira, then you can move 5,000 Naira from your entertainment category to cover it. In order to do this, you will need to check on your spending every day to see how much you have left.
- Finally, do it again. After you have completed your first month of budgeting, it will be easier to plan for the next month. At the end of the month look at how you spent and make adjustments for categories in which you spent more than you planned, and cut back on the categories that had additional funds in them.
Tricks to ease the budgeting process
Budgeting is difficult and raised different reactions from people who mostly find the process daunting and restrictive on their spending pattern. However, to attain financial independence, it is important for you to find a way to ease the process, and I am not talking about those hacks being peddled on the internet. The following suggestions can help to ease your budgeting experience and enhance your productivity.
- Find budgeting software, applications and templates that helps as guide to your budgeting process and the internet is replete with them. I want to recommend one that has aided me personally, it is the budgeting template designed by Yinka Ogunnubi.
- It is normal that in budgeting, some categories will be problematic, what you can do is to switch to cash for those categories. This works well for mostly discretionary things like your fun money for the month, lunches out at work and your clothing or entertainment categories. It can be used for groceries and other spending, too.
- To succeed in budgeting, you must do a regular check up on your budget, daily if possible but I recommend a weekly and monthly checkup. It can keep you from making a mistake or overdrawing your account.
- Ensure you find a way to save on your budgeting categories. Do not just rejoice when you finally meet up with the demands of your various categories, after that, you must ensure that find a way to draw little savings from the various categories. This is apart from your normal savings goals.
- Make budgeting as automatic as possible. Scheduling payments to come out automatically on your payday is one way to do this. Another option is to transfer money into savings automatically. Allowing your budgeting software to do a lot of the work as far as categorizing and recording your transaction can also help.
- You must keep learning about budgeting. Join communities online, read books, attend seminars. Do well to ensure you constantly educate yourself on the most suitable budgeting approach for your financial needs.