What’s a budget and what problem does it solve?
A budget is an estimate of income and expenditure for a given period of time.
Contrary to some beliefs, budgets are not for miserly or stingy people. Budgeting proves to be one of the effective ways of managing income (and money), and if followed committedly, could lead one to become financially responsible.
The important things to do before arriving at a budget are:
1. Income analysis
To start, you have to analyze your earnings and spending patterns. A good way to do this would be to walk back through your account statements up to the last 6 months. How much have you earned? How much have you spent? Have you spent more than you’ve earned? The analysis can help you answer these questions and determine what exactly your spending habits are.
If you used budgets in that time, return to them and see how well or badly you followed through.
2. Categorise your spending
Identify the main types of costs you incur. What takes your money and how much of it? Food, rent, clothing, healthcare, travel, and entertainment are some of such costs. Figure out how much you’ve spent on each roughly, in the last six months. This will help you get a sense of your outflow.
3. Make cuts
After identifying your spending areas and categories, the next step in making a budget would be to, find out all high-cost items that you can cut out without causing a significant discomfort in your lifestyle. For example; an expensive gym membership – especially if you don’t go regularly, cable TV luxury bouquets, etc.
4. Make a budget
Now that you have analyzed your income flow, categorized your expenses, and cut out some luxury, you can get to creating an effective budget.
Tabulate your expected spend, according to the categories you have identified going back a few months, while also excluding the luxury expenses you identified. Deduct 10% from the amount you have allocated to these expenses, as a way of disciplining yourself to make things work on less than you’re used to – that’s what this is all for, right?
Create your budget in a format that is easy to look at, and readily accessible.
5. Test your budget
The only way to know if a thing is effective is by putting it to the test. Work with your budget for the duration you created it to last, and track your performance against it. Did you do well within it? Did you have to reach into money you put away? It is important to stay disciplined on your first try. This will help you see the benefits of having a budget, and encourage you to maintain it.
6. Refine the budget
After your first run with the budget, identify the mistakes you made and things you could have done better. The idea is to eventually get comfortable with your budget, become consistent, and cultivate a healthy financial lifestyle by putting away money for savings and investments. Did you spend more on food than you thought you would, or did food just cost more at the time? Would you opt to increase the amount you allocate for food, or would you eat at a less pricey place? These are decisions that could lead to the right changes in your budget.
Pick one category every month and make a change. For example, travel – you could book your flights way ahead of time, or travel by road if you can, to save money.
Be consistent and thorough with the process.
It is necessary to stay accountable. This is a huge part of being financially disciplined. To stay accountable, you need to play by the rules of your budget and re-evaluate your progress often. Staying accountable requires effort, but it is totally worth it.