What is a Budget?
A budget is a financial outline designed to measure and guide your income and expenditures for a certain period of time, such as one month, one quarter, or one year. It is a guide that can help you track the amount of money you are making compared to what you are spending and saving. A good budget can give you confidence in managing your finances as well as assist you in achieving your financial goals and dreams.
How to Create a Budget
Here are five actionable steps to help you create a good budget.
1. Calculate your monthly income after tax: This is easy for people on salaries as they can get the information from their payslips. It is not so for people who work on a commission basis (like most sales agents) or who are paid on a project basis (like most creatives). If your income is not regular like salaried people, you could use your income for the last year to guide you on how much to expect the coming year. Divide the figure by 12 to get a monthly figure. This figure is not assured but it is as close as you can get to your future projected income. Deduct any statutory deductions like taxes and NSSF so as to have your net income.
Identify Fixed and Variable Expenses: Once you have a clear picture of your income, then you need to look at how this money is spent. Expenses are generally divided into two: fixed and variable.
Fixed expenses are expenses that hardly change every month. Examples include rent/ mortgage, loan payments, insurance premium payments, some utility bills like internet etc.
Variable expenses are expenses that vary every month like entertainment, dining out, clothing, transport costs, groceries, some utilities (electricity, water etc). It is easy to incorporate fixed expenses. For variable expenses, you need to get as close an estimate as possible. You can use the average you have spent on the expense over the last three to six months to help in coming up with an estimate. For example, you can estimate how much you will spend on electricity by taking the average you have spent over the last three to six months.
2. Set Savings and Debt Payoff Goals: It is important to allocate some funds on paying off debt. Most debt carries interest and as such, the faster it is paid, the better. Debt can be in the form of loans such as HELB loan, mortgage payments, personal loans, credit card debt etc. After allocating money to debt, you need to establish concrete goals. Classify them as short-term and long-term. Short-term goals can include saving money for a holiday, home improvement, building up your emergency fund etc. Long term goals can include building a retirement fund, paying off all your loans/ mortgage, saving to start a business or for a car/ house etc. Finances: How You Deal With Debt Can Make You Or Break You! What Are Your Debt Habits?
3. Record your Spending: It is one thing to come up with a budget and another, albeit more difficult one, to follow it. The best way to make sure you follow your budget is to track and record your spending. There are various ways you can do this. You could use the numerous money tracking/ budgeting apps available on both App Store and Google Play (such as Wallet, Money Manager Expense & Budget, Spending Tracker, Budgeting Buddy, Every dollar, just to mention). If you are old school, a paper and pen would do. Alternatively, a good old excel spreadsheet. There are also numerous online budgeting tools such as Buxfer, Budget Tracker, Mint and Goodbudget. Technology: 5 Financial Apps You Should Have
4. Review and Revise: A budget should not be static. Your income, expenses and lifestyle might change and it is important to ensure your budget still works for you. As you continue budgeting, make adjustments as you see fit. It is good to review your budget every quarter to see if any major changes or milestones have taken place. Not only will this help you recognize and celebrate your successes, but it will also encourage you to re-evaluate and tailor your strategy as needed. Planning for the future; How to create a Financial Plan
5. Budgeting Styles
Not every budgeting style suits everyone. What can work for me may not necessarily work for you. Here are a few budgeting styles/ methods you can consider.
Balanced Money Formula (50-30-20 Method): The idea is to spend 50% of your total income on your needs, 30% on wants and 20% on savings. Needs are things that you cannot live without such as rent/ mortgage, utilities, clothing, groceries etc. Savings consist of your retirement goals, emergency fund, travel fund etc. Wants are what you want, basically everything else, including the internet, entertainment, dining out, non-essential shopping etc. This is a good budget for someone who only wants to worry about 3 categories rather than budgeting for every line item.
Cash Only Budgeting (Envelope Method): In this method, if you budget Kshs. 10,000 for eating at restaurants, put that amount into an envelope. When the money’s gone, you have to wait until next month to eat out again. If you budget Kshs. 2,000 for groceries, put the Kshs. 2,000 in a “grocery” envelope. You have to spend only Kshs. 2,000 for groceries. You can also use Excel for this method, or the Mvelopes Budgeting App, which uses the same system. This is a good budget for someone who struggles with overspending and would like to reign it in since once the cash is gone, you can’t get more.
Zero-Based Budget (Give Every Dollar a Job Method): With the zero-based budget technique, each month begins and ends with zero shillings. When you build out your zero-based budget, every shilling has a purpose. If, for example, you make Kshs. 35,000 every month, attribute each shilling to an expense. You might put Kshs. 17,500 toward living expenses, Kshs. 7,000 toward paying off debt, and Kshs. 10,500 toward personal expenses like going to the movies or saving for a vacation. At the end of the month, your balance is zero, because every shilling is accounted for. Keep in mind, the zero-based doesn’t mean you’re spending every shilling that you earn, but rather, that each one is allocated to a different category—savings account included! This is the ultimate budget for those who want to be completely in control of their money. It allows you to micromanage your money—in a good way—as you see fit. You get to decide in advance where every one of your dollars gets to be spent.
The 60% Solution: Similar to the Balanced Money Formula, this method uses percentages to manage your finances rather than specific amounts. 60% of your income is used for “committed expenses.” These include your rent/ mortgage, food, basic clothing, car payments, insurance, etc. Where this differs from the “needs” category of the Balanced Money Formula is that literally ALL of your bills are included in this category, including such wants as internet costs. These are bills that have to be paid each month. The remaining 40% of your income is divided into four categories with 10% allocated to each of the following: retirement; long term savings (+ emergency fund); short term savings (for things like holidays); and fun money (which includes things like dining out and entertainment). If you’re someone who likes to automate things this is a great way to ramp up your savings. By only allowing for 60% of your income to be used for bills, you have the ability to save much more than normal. It’s almost like giving yourself an artificial pay cut and living “paycheck to paycheck” on 60% of what your income actually is.
Finally, you can also create your own budget by combining portions of the methods outlined above that suit you best. In order to create your own budget, you have to first do some research and learn about the budgeting methods available to you. You also want to ask yourself exactly what you want out of your budget. Knowing your options will give you a good start in creating your own budget. Here are 5 Tips To Help You Stick To Your Budget
Here is an article which has more types of budgets you can use – The Ultimate Guide to the Best Budgeting Methods