The process of balancing our income with our expenses is called ‘budgeting’. It is a way to plan to manage our expenses and money. It allows us to plan for future expenses, gives us an idea to prioritise our expenditure, save money for future needs, and keep us out of debt. Many of us think budgeting is about spending less, whereas its actual purpose is to spend less than we earn.
To keep our finances on track, we must learn how to spend less than we earn. Thus, we must plan and map our ‘spendings’ (expenses). By doing this, we can forecast our spendings and savings. One must always have a realistic expenses tracker and be honest about one's income and expenses. This may help in long-term financial planning and keep one out of debt.
Financial planning allows us to fulfil our short- and long-term goals like buying a car, going on a vacation, buying a house, or planning our retirement. One must always plan and know one's expenses. Not paying attention to the budget may lead to unpaid bills, maxed-out credit cards, debt, and, most importantly, mental stress.
Good financial planning has lots of perks: good vacations, dinner parties with friends and family, paying off loans, emergency funds for unexpected expenses like medical bills, backup money in case you lose your job. All these can happen if there is good budgeting. All one needs to do is track one’s weekly/monthly expenses, note them down, track and control any unnecessary expenditure.
Budgeting also makes you to be aware of bad spending habits. It will help you to recognise a pattern if you are spending on items that you do not need. For example, it will make you wonder if you really need that tenth pair of shoes or to order food five nights in a row? Budgeting will force you to rethink your spending habits and shift your focus back to your financial goals.
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How many of you have spent sleepless nights wondering how to clear the long-due credit card bill or source funds for an emergency? As a result, you lose your mental peace and sleep over financial stress. Do not allow money to control you; instead, learn how to manage your money. Budgeting helps in getting back that control and also gets your sleep back.
What you should consider when budgeting
Budgeting may sound complicated, but on the contrary, it isn't if we know where our money is going. It is about knowing our needs and our expenses. It does not matter how much one earns; one must know how to allocate his/her funds in the best possible way.
Even if our finances are in good shape and order, good budgeting may surprise us by letting us discover some hidden issues with our finances and help us spend and save more wisely.
Before we start budgeting, we must think about future goals. What do we wish to accomplish in the coming few years with our money? It may be a plan to start a business, get married, start a family, pay off loans, or move to a new city/country. At the same time, it is important for us to have short-term plans too.
#1. Be intentional about budgeting
The first step towards budgeting is to have the intentions. Having concrete and clear intentions will help you plan your budget in the best way, and you are more likely to stick to the plan. At first, it may seem difficult and confusing.
Always remember to start with the basics. You should then note your fixed and variable expenses such as house rent/loan, groceries, travel expenses, and subscriptions. One can do it manually or use software and apps like like Mint, Personal Capital, and others to enter the data (Dore, 2021). The plus point with these apps is that it analyses your data and presents it under different sections. This analysis will help you to understand your spending habits better. It can also act as a reminder to be on the right track (Vohwinkle, 2009).
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#2. Develop a way of tracking and appraising your budget
Once the budget is created, then comes the tricky part of tracking it. This tracking plays a key role in your future financial plans.
You need to track your budget monthly for at least three to six months. This tracking will help you identify weaknesses in your budget. Then appropriate action can be taken to cut or add the amount in any particular segment.
One should avoid making significant changes or cuts in the budget in the initial months, as the changes need to be gradual. The budget can be further adjusted in the future. Remember the rule that it is okay to spend more in a certain segment, but make sure to adjust it within the budget rather than putting in more from your pocket.
"Married couples can combine their finances, but always be transparent and accountable towards your finances and budget. Just like an alternate account, start a joint account, ..."
#3. Consider both short-term and long-term goals
To progress in the right financial habits, one needs to keep setting short-term goals and stick with one's budget plans. Do not forget to reward yourself for reaching a certain goal.
For example, when you have successfully achieved the goal you set for groceries, go treat yourself to a good dinner at a restaurant. You cannot cut down on your fixed bills but make sure to look for online deals or sales for shopping, subscriptions, memberships, etc. This practice may get you some good deals, which in turn will save you a lot of money.
Use a budget worksheet to keep everything organised. You can categorically track where you are spending more and where you can cut down on spendings. If you stray from your budget, it certainly means you are overspending. The budget sheet will help you to identify the areas of concern. There are various ways one might overspend; understanding the category where you overspent will help you control it and keep your financial goals on track.
#4. Avoid transacting with plastic money (credit/debit cards) when possible
It is not advisable to keep “plastic money” (i.e. credit and debit cards), but in today’s fast-moving world, having plastic money is more convenient than carrying cash everywhere. While using plastic money, please do some research, a little research may help a lot.
Be mindful of the interest rates that the banks charge on the credit card and the annual maintenance charges. Most banks offer loyalty points on their credit cards. These can be reimbursed via vouchers that can be used for shopping, cashback, etc.
In some cases, if you pay the amount spent on the credit card before receiving your statement, you can avoid being charged interest on credit card usage. If possible, do not use credit cards for a while; the ease of buying anything online via credit/debit cards often results in buying things that you may not need and this results in overspending.
Instead, you should opt for old traditional ways of spending money, that is by using cash. This may not be a faster and smarter way of making financial transactions, but it has its benefits. When you use cash to buy products and services, you will be mindful of your spending and amazed to see how much you have saved.
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"One must always have a realistic expenses tracker and be honest about one's income and expenses. This may help in long-term financial planning and keep one out of debt."
#6. Watch out for better deals and pay attention to your taxes
Save before you shop for anything like a motorbike or car. Do not hesitate to buy a used car, but ensure to get it checked thoroughly by the experts. Research and negotiate well because this will help you to decide on a good deal. Alternatively, you can always use public transportation as it will not only save your time (sometimes), but you will also save money on car insurance, taxes, maintenance costs, fuel costs and also reduce your carbon footprint.
Never forget the taxes. They are painful to pay but can be worse if not paid. Have a good accountant by your side and determine how much taxes you need to pay and allocate funds accordingly in your budget. Plan for the future, and keep your taxes ready in advance for the coming months or quarters.
Constantly review your budget as it may fluctuate each month; some months, the bills may be high, some may be low. Review and adjust your budget to maximize your savings. Your budget will always play a significant role in your life, no matter at what point in your life you are. It is the first line of defence and highway towards your financial freedom. Plan it well and stick to it.
(…to be continued)
Let’s dazzle together as we learn more about budgeting in our families, partnerships and for personal financial goals. Watch out for a follow-up article by Asipa Olalekan on ‘Realising your family’s financial goals by making smart budget: A step-by-step guide’.
Olalekan Asipa is a personal finance coach, an author and an engineer.
He is passionate about helping people get out of debt, grow their income and gain financial freedom.
Olalekan believes everyone should improve their financial knowledge, as this will help shape their decisions on their finances.
He is married with two beautiful daughters.