Personal budgeting

The term ‘budgeting’ might sound boring or might even scare most of us. But it is something we need to do at some point in our lives so that we can extract the maximum value out of our income. 

Why budget?

Budgeting is the most important way you could understand and take control of your finances. Having a personal budget would help you to spend on the most important things and assist in planning for a solid financial future. It can also assist those who want to repay all their debts, reach break-even and want to stay out of financial meltdowns.  Budgeting can be very rewarding because we get to spend on things we love without feeling guilty. For example, you have money allocated on your budget for cloth shopping and entertainment that needs to be spent. 

What does budgeting involve?

Budgeting involves listing down all your incomes, expenses, setting limits, analyzing results, checking for variances and making improvements along the way to make sure that expenses are not greater than income. It might sound like a daunting and challenging task, and for most of us it is. But the challenge is not in preparing the budget; it is in in sticking to the budget once it is prepared. Successful budgeting requires experience, will power and loads of discipline. You need to learn to be accountable for each RF spent. 

Successful budgeting involves the following steps;

Define the goal of your budget: different people budget for different reasons. It might be to save some money, to repay debt, to have a secure financial future, to find out where all your money is going or to simply stop wasteful spending. A successful budget is one which enables you to meet your budget goal at the end of the budgeting period.

Set the effective date for your budget: You can set the effective date for your budget after discussing it with the people in your life who might be affected by it. This might include your dependents and your life partner. Discussing the budget with them would help you to come up with a solid budget and also getting the commitment from your family would help you to follow the budget closely. You can either prepare a quarterly budget, half yearly budget or a yearly budget; whichever suits your needs best.

Track down your expenses and list down your income: For at least a month, track down all you’re spending. A month’s worth of expenditures written down on a piece of paper would be very helpful in creating your personal budget. 

After one month of tracking down your expenses, you are ready to create your budget. Or you might create a draft budget, review and make improvements on it for one month and then at the end of the month prepare the actual solid budget. 

Determine budget categories: this would include specific categories of spending such as entertainment, groceries, travel expenses, child care, medical, etc. these budget categories are going to be included in your budget. 

Assign expenses to these specific budget categories: for instance, buying milk and bread would go under groceries expenses and buying a movie would go under entertainment. 

Distinguish variable and fixed expenses: Fixed expenses would include such items such as rent and mortgages. These are expenses that stay constant each month and does not change with the level of activity. Fixed expenses would remain the same throughout the budget period. On the other hand, variable expenses include those expenses which change with the level of activity. Most of the day to day expenses would come under variable expenses. 

Fill out the personal budget template: click here to get access to 15 free personal budget spread sheets. Most of these templates are very user friendly and can be used by almost anybody. Look around for the one that best suit your needs. Enter your expenses and incomes in to the required fields, and the worksheets would do the rest of the work for you. 

Take your time preparing the budget and be honest with yourself. Try not to underestimate the expenses and overestimate the income. Make sure you list all the expense despite how small it is, and if you don’t see a specific budget category for the expenses, put it under miscellaneous or ‘other’ expenses. 

Review the budget and make appropriate changes. After finishing the budget, ask yourself how realistic it is. You might be tempted to stretch your budget and end up with a big saving. But an unrealistic budget can be very demotivating. Make sure you understand the difference between discretionary expenses and non-discretionary expenses. Discretionary expenses are those expenses that you can reduce, increase or forgo. For example, this might include entertainment expenses or the eating out expenses. If you want to save more, you can forgo or reduce these kinds of expenses. On the other hand, non-discretionary expenses such as utilities, basic grocery items and school fees cannot be easily foregone or reduced, so you would want to make sure that you have at least enough money to cover these items. 

Stick to the budget: Following a budget involves lot of discipline and willpower. Whatever happens don’t give up on the budget. It takes time to excel at budgeting and trial and error is expected. 

Continuous improvement in your budget: After each month, you should analyze your results and make improvements. If you did not meet your budget targets, ask yourself what went wrong. Were you too strict in budgeting or were you too lax in spending? 

For example if you planned to save RF 1,000 and end up with RF 500 instead, you should try to find out the reason for this variance. It might be because you missed out some of the expenditures. Try to correct the problem in the next month’s budget.  Remember that there are only two ways that you can improve your budget. It is either through reducing expenses or increasing your income. Increasing income is harder than reducing the expenses. 

Finally, you should remember to set some money aside for a rainy day. From the money you save from budgeting, set aside 1-2 months’ worth of expenditure as emergency funds. In case something happens to you and you are unable to earn any income, this emergency fund will come to your rescue and enable you to continue with day to day expenses without having to reduce your quality of life.