A budget is not just good to have, it is essential. Having a budget means you know exactly what money you have, what money you owe, and what money you have left after expenses. You can either wonder where your money went to at the end of the month, or you can make a budget at the beginning of the month and tell your money exactly where to go. Here is how to make a budget.
- RECORD ALL YOUR SOURCES OF INCOME
Your net income is the amount of money you make after tax, deductions and any other thing attached to your salary. It is the actual amount you will be working with. You need to include all sources of income that is your salary, side business, money coming in from the farm back at home and all that. Putting down all your sources of income gives a clear picture of just how much money you really have. More often than not, people overestimate the amount of money coming in especially if they have several sources of income. Never overestimate your income.
- MAKE A LIST OF ALL YOUR MONTHLY EXPENSES
Make a list on everything you spend money on. From the rent, mortgage, car payments, utilities, groceries, loan repayments insurance to money you spend on entertainment and petty spending. If you pay for it or buy it, record it. If you have a fixed saving account, contribute consistently to a chama, tithe or regularly send money to a dependent, include it here.
Then divide this list into fixed and variables. Fixed are those that remain relatively the same all through the month like rent and school fees. The list of variables are things where your spending on them varies from month to month like groceries, entertainment, and this list should also have the non-essentials. It will come in handy when making adjustments.
- SUBTRACTING YOUR EXPENSES FROM THE TOTAL AND ADJUSTING
This step is as simple as elementary month. You will subtract your expenses from your total income. If you have surplus, you are in luck. Do not start inventing new expenses to splurge on. Jump straight to the next step.
If your answer is a negative, that is, if you spend more than you make, it means you are in debt. You must go back and adjust your expenses. Start with the variables. Find anything that you can spend less on or slash out of the budget completely. You are at a precarious place my friend, so get creative. Do not hold on to anything that is not essential. If you continue down this path, it will not be long before you are completely in over your head in debt.
Wipe away that self-satisfied smirk off your face if your expenses and income balance off. You are one minor incident away from bankruptcy. What happens if the fuel cost rises by 16% in the middle of the month or your TV breaks down? Your entire budget will be thrown out of sorts and you will start borrowing.
The best position to be in is to have an excess of at least a quarter of your expenses. This excess will be used to build your emergency fund, to prepare for the future and to finance your dream.
Remember that list of expenses, lets deal with the variables first. Depending on how much you need, cut down costs on the list of variables. You will need to sacrifice even more if you are living in debt or spending all or almost all that you earn. Do not hold on to any luxuries you cannot afford.
If that is still not enough, you may need to get into a radical debt repayment program. I recommend The Financial Diet debt repayment plan or my personal favorite The Dave Ramsey Debt Snow Ball. The latter has been used by millions of people all over the world to set them free from debt and to live free from financial stress.
- WRITE DOWN YOUR FINANCIAL GOALS AND ADJUST EVEN MORE
It is important to also think about long term and short term financial goals. The most important being having an emergency fund. An emergency fund is money set aside to cover unforeseen circumstances like funeral expenses, loss of a job or unexpected illness. It should have at least three to six months’ worth of day to day essential expenses. This should be a short term financial goal. The next most important financial goal is paying off all debts.
In this stage you have to think about retirement, investments and savings. I personally think that if you set goals you will find ways to achieve them. So while other people total their expenses first then adjust their goals according to what money left over, I like to make the goals and think of it as an expense when totaling my expenses so that I can adjust my spending and not my goal. Either way is fine.
Now that you have financial goals, you should finance them. That means adjusting your spending even more.
And that is how you make a budget. Just remember to revise it every single month. The easiest part is making a budget, the most important part is sticking to it.