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Budget is one vital financial tool that anyone can use to shape his finance. It is quite unfortunate that many people are ignorant of this. Or is it that they don’t know how to make it work? If you are a grown up adult, you must have heard about budget. The only thing is that it is possible that you have not really sat down to reflect on the need for it. As big as any nation may be, it will always come up with its yearly budgets. This applies to corporate entities and organizations you can ever think of. The truth is that, if budgeting is not important, nations and organizations will not devote their time and resources to its preparation. So, if nations and organizations can deem it fit to prepare their budgets at the beginning of every fiscal year, you should know that it will also be important that individuals incorporate it into their personal finance. How can you do this? You don’t need to worry too much about how. What you need most at this stage is a decision to make budget as part of your personal finance. From there, I will take it up for you.

Budget Definition

What is budget? It is possible that you have been hearing the term “budget” and you have been wondering about its meaning. That is why I will start by defining budget in a layman language. Firstly, I want to believe that you are familiar with the word “plan”. We use this word very often. You hear people saying something like: “I plan to travel next week”; “I am planning to go back to school”; “I am planning for my wedding” etc. All these examples are decisions or intentions of what you intend to do. I like the way dictionary defines the word “plan”. It defines it as a detailed proposal for doing or achieving something. That is, the action is yet to take place. It is what you will do in the future. I hope you understand this clearly. Now, let’s try to define a budget. Budget is actually a plan too. But in this case, we are going to add the word “financial” to it. Any time you hear the word “financial”, it has to do with money. So, budget can be defined as a financial plan for a specific period of time in the future. Budget should have a time frame. It can be for a week, month or one year. Your budget is a highlight of your future income and expenses. In other words, your budget will show the income you intend to earn and how you want to spend it. It is that simple.

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Although there are different types of budgets but they may not be relevant to you. For example, corporate organizations prepare different types of budget such as cash budget, sales budget, marketing budget, production budget and capital budget etc. All these budgets can also be combined together to prepare the company’s budgeted financial statements. This essentially will comprise budgeted income statement, budgeted balance sheet and budgeted statement of cash flow. Budget can be prepared using different approaches such as incremental budget approach, zero based budget approach, flexible budget approach and performance based budget approach. The time and other resources that an organization will need to prepare budgets will depend on the type and size of the organization and their commitment to the preparation of the budget. As an individual, I will not want to bother you too much in this area. It is better that we limit ourselves to those areas that are important to you. The context of this article is the preparation of budget as it relates to personal finance. So, how can you prepare your own budget? There are basic steps you need to take and these are discussed below:

1. Set Goals: You need to set goals for yourself. Living with a goal is like football players on the field playing without a goal post. There should be certain things that you like to do or achieve within a specific time frame. The first step towards budget preparation is for you to determine your financial goals. Your goals may include any or all of the following:
   • To save for retirement
   • To buy a house
   • To buy a car
   • To save for your children’s education
   • To have certain amount in emergency fund
   • To save so as to have capital to start your own business
   • To save for a vacation

If you go back to our definition of a budget, I mentioned that budget is a financial plan. You can see that all the above lists are just plan. In order to make it part of your budget, you will need to assign figures to them. For instance, if you want to buy a house, you should be more specific. When exactly do you plan to buy the house? How much do you think the house will cost you? After you have provided answers to the questions, you can now re-write your plan to be, “I plan to buy a house that is worth $300,000 in 3 year time. Your goal may not be to buy a house. I will show you a template that will help you come up with your own goal. When drafting your goal, you just need to ensure that it is SMART. SMART is an acronym. It means that your goal must be Specific, Measurable, Achievable, Relevant and Time-bound. I will expatiate further so as to ensure you really understand it.

Specific: You should be able to say in concise words what you plan to do. You should be able to answer the why, what, who and when as relates to the goals you are setting. What do you want to achieve? Who are those people that you need to involve for you to be able to achieve the goal? Why this goal? And when do you want the goal achieved.

Measurable: You should be able to measure the progress of your achievement of the goal. For instance, if you want to buy a house of $300,000 in a 3 year time, you may want to be saving $2,000 every month so that you can have enough money for 20 per cent down payment and the closing costs at the end of the third year. You can easily determine how close or far you are from achieving the goal at the end of the year.

Achievable: When setting goals, you should be very realistic. Don’t be over optimistic about your income. If your earning is just $5,000 a month, it may be unrealistic to now set a goal that you want to be saving $4,000 every month so that you can buy a house of $300,000 at the end of the year. When setting a goal, you should ensure that you have enough resources that will help you achieve the goal.

Relevant: You can divide your goals into short, medium and long term goals. Your goal should align with your values and you need to get the timing right. Doing the right thing in a wrong time can make mess of a lot of things. In other words, you should get your priority right.

Time-Bound: You can’t leave your goal open ended. You should set a time frame for what you want to do. You need to set a specific deadline. For instance, you may plan to achieve a particular goal in one year.

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2. Start with what you have: If you want to want to prepare a budget, you just need to start from somewhere. It doesn’t matter whether your account is in red or not. You should be willing to start.
3. Identify sources of income: What are the sources of your income? Your income may include salary, bonuses, dividends or income from other investments. It is better you only list the income that you are certain that you are going to earn. However, you can incorporate any other income you receive later. It is possible that you receive bonuses, cash gifts and sale of items.
4. Determine your expenses: Your expenses are those things you spend money on. Some may be recurring while the others may be seasonal or one-off. Some may be fixed while some may be variable. Whatever the nature of the expenses, ensure that you capture them properly. Your expenses will cover food, grocery, transport, utilities, insurance, mortgage payments, day care, pet care, entertainment, gym membership, hair care, parking, clothing and shoe etc. Your utility expenses will include cable, phone, electricity and water bills. Your expenses may not necessarily include all these items, you just need to pick the ones that are relevant to you. Also, you should endeavour to include the ones that seem to be missing. The important thing is that you should ensure that you capture all your expenses. If you are preparing a budget for the first time, there is tendency that you will omit some few expenses. That is why it may be necessary to make a provision for additional five to ten per cent of the expenses you have identified. By the time you run the budget like six months, you will be able to know precisely your average spending per month.
5. Trim your expenses: After you have finished listing all your expenses, you should compare your expenses with your income. It is not uncommon that you will realize that your expenses are almost equal or more than your income. This means that you may not have anything left for you to save at the end of the month. For this reason, you may need to look at your expenses again to see the areas where you can make some savings by slashing some of the expenses. The quickest way to save costs is to identify those expenses that are not necessary. For examples, you may discover that you are paying too much on your cable TV and decide to trim your expenses based on the program you actually watch. You can also cut your electricity expenses by ensuring that you switch off lights and appliances you don’t use. Even, for items considered important such as food and clothing, you can still find a way of reducing the amount you spend on them every month. You may not need to buy that new cloth. It may just be that you only need to maintain the ones you have for now. Preparing your own meals instead of eating at restaurants may impact your budget positively.

Apart from cutting your expenses, you can also try to increase your income. At times, you realize that after revising your budget over and over again, you still can’t make enough savings. In this case, you may need to increase your income. This may mean that you need to get a second job or start a side business that can fetch you extra income.

6. Determine to live by the budget: It is not enough to prepare a budget, you should be disciplined enough to live by the budget. Initially, this may be like a difficult thing for you to do. But by the time you practise it for like three months, you will soon get used to it. How do you live by the budget? It is simply by refusing to buy those things that may make you spend beyond your budgeted expenses for the month. Once you have reached your benchmark for the month, other things may need to wait till the next month.
7. Keep Track of Your Spending: You should put a system in place that will help you capture your expenses. If you don’t capture your expenses, there is no way you will know whether you have exceeded your budget or not. There are free template you can download online which can help you keep track of your personal income and expenses. With the spreadsheet, you will be able to compare your budget with actuals. Over time, there may be a need for you to review your budget to align with your current situation. For instance, it is possible that you change job. Your new job may offer you a bigger salary. You will need to adjust for this in your budget. You may also need to adjust your expenses too. However, the fact that your salary has increased does not mean that you should also increase your expenses in the same proportion. When you enjoy a raise in your salary, you should see it as an opportunity for you to save more.

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Advantages of having a budget

• Accountability: Budget makes you accountable to yourself. Without a budget, you may just be earning and spending the money without knowing where the money is going. But with a budget in place, you can actually tell how you spend your money.
• Goal setting: Budget forces you to have a goal. Not only that; budget can help you stay committed to the realization of the set goal. You can be sure that whatever income you have will be directed towards the realization of your goals.
• Unity of purpose: If you involve your spouse in the preparation of the budget, the budget will keep both of you on track and ensure that you are pursuing the same objective. You will be able to prioritize your expenses and you will understand why you are doing what you do. You don’t buy things on impulse.
• It helps eliminate financial stress: Budget is all about planning your spending ahead. With budget, you can predict your spending to a certain degree. This give you peace of mind.

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