If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed. –Edmund Burke
A budget is a plan to show how much money a person or organization will earn and how much they will need or be able to spend (Cambridge Dictionary).
It’s an estimation of revenue and expenses over a specified future period of time and is utilized by governments, businesses and individuals. Budgets are important tools in managing one’s wealth and should be understood by all. There are however, a couple of myths that surround budgeting, that discourage people from wanting to know more about it.
- There is no need for it.
Some people believe that there is no need for budgeting. This is not true, budgets are important. They help one to ensure that their money is put to good use. Additionally, they help one in identifying any poor spending habits that they may have and therefore, take the necessary steps to try and rectify this.
- I need to have a business background.
Budgets usually come up in business discussions, therefor it is not a surprise that many believe them to be tools that are required only in the business field. Yes, budgets are important tools used by the government and corporations, but they are also important in the lives of individuals. One does not need to have a business background to learn about budgets.
- I don’t plan on making a big purchase.
It is the belief of some, that the only time budgeting is necessary, is when one is planning to make a big purchase, for example, if one is planning on buying a car, or if one is planning on traveling. While there is some truth to this, this does not paint the whole picture. Budgeting should be a regular thing, not only when a big purchase is on the horizon.
- Budgets have to be very detailed.
Budgets do not have to be in the form of complicated spreadsheets, they can be quite simple. For example, one can employ the 50/30/20 rule in budgeting, where 50% of one’s income goes to paying for their needs, like rent and electricity, 30% goes to any wants they may have, for example travel, and 20% goes into their savings.
- Budgeting means denying oneself.
There’s a negative belief that budgeting means denying oneself. On the contrary, budgeting is a tool of empowerment. It helps you to manage your funds, so that you are able to spend without worry.
Importance of Budgeting
There are many benefits to budgeting:
- Emergency Fund
Emergencies always come up. Through budgeting, one is able to keep money aside for any contingencies that may arise in the future. This helps to put the mind at ease, as one knows that they have some savings, incase anything comes up.
- Ensures proper fund management
Budgeting helps one to always have money for the things they need. This is because it helps one to identify the necessities that they need to spend money on and allocate the necessary funds for them.
- Gives a clear picture of one’s spending
A budget is a plan, a roadmap. It helps one to identify their income and also their expenses. As such, it gives a clear picture of what one is spending their money on.
- It makes one accountable
As previously discussed, the budget is a plan. By identifying what you are spending your money on, this makes one more accountable and also responsible when it comes to their spending.
- Helps to regulate your spending habits
A budget helps one to identify any bad spending habits that they may have, and take necessary steps to try and reduce these habits.
Simple way of creating a budget
- Identify how much you earn. It is important to take note of your income. This may be monthly or weekly income. Monthly income may be the most ideal. Identify how much you earn in a month. It may be a regular amount for some, or irregular for others, but that’s okay. Jot down what your income is.
- Identify your expenses. Identify what your needs are and also your wants. Your needs are those expenses that you accrue every month and wants are the luxury items that you buy for yourself. Identify both. Also identify how much money you put in savings.
- Compare your income to your expenses. Compare the two and see what the balance is, if it is zero, it means that your income is able to support your spending habits, if it is a positive figure, it means that you still have some money left over after paying for your expenses. This is good, as it means that you can increase the amount of your savings and also investments. If the figure turns out negative, this means that you are spending beyond your means. You may have to reduce your expenditure, or try and find additional sources of income.
- Making adjustments. Once you have identified what the income to expenditure ratio is, make adjustments for the next month.
The 50:20:30 Rule
This is a simple strategy that you can use to help you budget. It follows three simple rules:
- 50% of your income should be spent on your living expenses. Things like your rent, electricity bills, utilities, groceries and transport expenses.
- 20% of your income should be used for your financial goals. Things like your savings and investments. It should also be used to try and reduce any debts that you may have.
- 30% of your income should be used for luxury products. These are those things that you desire, but you don’t necessarily need, like going out with friends, travel and many more.
- Budget in advance. It is always wise to budget in advance. This helps to reduce the chances of impulse buying and also helps to ensure that the necessary expenses are taken care of.
- Track every expense. Do not let any expenses fall through the cracks as you need to have an accurate idea as to what your spending is, so that you can budget effectively.
- Set a realistic budget. This is very important. Set goals that you can achieve and write them down. Also, keep track of your progress and be willing to make any necessary adjustments.