Author and personal finance coach, Mr. Usiere Uko, writes about developing a budget that works for you, powered by a clear financial goal
Budgeting is an area most of us struggle with, ranking close to weight loss. Many have given up entirely on budgeting and concluded that budgeting does not work. We are all different, with diverse money habits, goals and aspirations, experiences, circumstances etc. Some of us are good with numbers and can look at it all day long while some, like me are interested in concepts, the big picture and the bottom line. There is no one approach that works for everyone. You need develop a system of budgeting that works for you.
According to Webster’s dictionary online – a budget is an amount of money available for spending that is based on a plan for how it will be spent; a plan used to decide the amount of money that can be spent and how it will be spent.
How do you develop a budget that works for you?
The starting point is to determine why you are budgeting. If you are budgeting because you think it is a good idea, or you simply want to make sure your income will go round, you may be budgeting but heading nowhere financially.
Your budget is simply a tool to achieve a financial goal. It helps you spend less than you earn and pay yourself first. Without a financial goal, the drive and motivation to stick to a budget wane. It becomes an empty ritual, a dead document. I still remember my budget ritual during my first 10 working years. I had a template which I did the best I could to stick to. I did for a couple of months and hardly referred to it thereafter. It became a boring routine. I started budgeting inside my head. I had a general idea what the key items were, so I never bothered to go back and track my spending. One consequence was that I missed out on some items that came back to bite after the money allocated to them was long gone.
If you do not have a strong enough reason why, you will not remain motivated long enough to do what it takes to follow through, until it becomes a habit. You will seek the path of least resistance.
Let’s look at some ways you can set up your budget in such a way that you stand a fighting chance of making it work – aka help you achieve your financial goals.
The first thing you do is to capture all items of expenditure in a budget. This includes monthly, quarterly and annual. For example, if you need to save monthly towards your children’s school fees, the amount you need to put aside every month needs to feature in your monthly budget. The same for house rent, vacations, car insurance and other expenses that do not occur monthly. If you fund them through lump sum income like vacation pay, rent allowance and other bonuses (for employees), you have to capture that also, and make sure you have enough as and when due. There should be no surprises.
Itemise your expected monthly expenses and group them into three.
You can group your expenditure into three broad categories:
1) Necessities (fixed): These items are important, fixed and inflexible (you cannot change the amount due), e.g. rent, loan repayments (mortgage, car payments etc), school fees etc. You cannot cut costs here. They are what they are. The only way you can change the amount is to change the item (move to a cheaper apartment, children’s school, car etc.)
2) Necessities (variable): These items are important, but the amount is variable. This includes, food, utilities (power, phones, TV etc). There is room for cost cutting if necessary to make the budget work.
3) Discretional expenses: These items are nice, but you can do without them. These include entertainment, travel, ticket to events etc. This is where you start your cost cutting from, before heading for group two.
Use automated tools to execute your budget
If you use online banking (which is free and open to every account holder), you have access to a variety of online tools to assist you in executing your budget. You can execute your budget on auto pilot if you choose to. Some banks now have online budgeting tools. You can set up automatic bill payment, direct debit / standing order to remit funds to your fund manager / investment portfolio (pay yourself first), give to charity, fund your children’s school fees account, send housekeeping money to your wife, remit money home to your parents etc. You can set it up in such a way that the only money remaining is your pocket allowance which you can access via your ATM card.
For a woman, there are also tools online tools you can use to manage the household budget under your purview, and if you are not so inclined, you can fall back to the ‘envelope formula’, where you segment the cash into envelopes.
Monitor your expenses
After setting up your budget, you need to monitor how it works. One of the most frequent question we ask ourselves is ‘Where did my money go?’ Even with a well laid out budget, you may be surprised that the money does not go round. Having a budget does not make you disciplined overnight. Automating your budget helps reduce impulse spending but there is still wriggle room to overspend.
Find out how your budget is working by itemizing and reviewing your expenses. It is much easier now with online banking and purchase receipts. You can always set aside a block of time to itemize and review your expenses. This forensic review will answer the question where your money went. You can see what went wrong and decide how to correct it. Becoming aware what the issue is puts you in a strong position to make it right, rather than being clueless.
Reduce ATM card purchases
Consumer studies have shown that we spend 20 per cent more when we use cards than when we use cash. The explanation is that we see cash as limited, so we tend to reduce spending make it go round. Running out of cash at the checkout is an embarrassing situation, so we tend to under spend to make sure we have enough money to avoid that embarrassment. When you are using a card, you feel there will be enough to cover the items you have picked, even when you go above. Often times, we are shocked when the totals come on the screen at the checkout, but we are too embarrassed to ask the teller to drop some items. We know we have gone overboard, but to save face, we pay on and go home while groaning inside.
Have an accountability partner
Have someone support / help you by keeping an eye at what you are doing to keep you accountable. That is the reason we have coaches. If you train alone without having someone help keep you on your toes, you easily slide back with no one to pick you back up.
This all comes back to why you are doing it and how important it is to you that you succeed. The best budgets and budget programs will not succeed unless you have a clear goal you are committed to achieving in spite of the pain of delayed gratification. There is no easy road to success. You need to have a clear vision where you want to go, and commit to paying the full price.