Budgets?
He who fails to plan, plans to fail. A personal budget is a plan: a spending plan.
A budget is a financial plan, a guide on how money is expected to be spent. Its a list of estimated spending and attached to a time frame. Budgets are prepared to guide spending. Helping to know how much is being spent on specific items over a period of time. They also help in making forecasts and curbing unnecessary spending.
Most people spend on impulse and don’t make budgets. Doing this may result in no issues arising but its recommended to have a plan in to be successful. To be financially successful, creating and implementing budgets is a necessity in ones financial toolbox. Budgets can help in knowing how much luxury one can actually afford, set realisable targets and regain control over spending habits.
How to prepare a personal budget?
- Choose a reference time frame. A time frame aligned to when income is received works (monthly is recommended).
- Record all common and major expenses within the time frame. These are expenses that are reoccurring (e.g. transport, feeding, utilities, dues, rent etc) and non-reoccurring ones that are known.
- Take note of income received for the time frame chosen after all deductions (such as tax). When expected income varies, the least possible amount of expected income should be used.
- Group expenses that are similar together into categories e.g. car servicing cost, car fuelling costs, tickets and similar expenses can be grouped under transport.
- Write out an estimate of how much you expect to spend on each expense for the chosen time frame. If the expenses occur less than the time frame, sum up for the chosen time frame or of it occurs greater than the time frame divide the cost to fit in the chosen time frame.
- Sum up the costs and make adjustments, if its greater than your income reduce amount spent in some areas or remove unimportant expenses. Also create a misc expense to cover for unplanned expenses. If possible try to have some cash spare not budgeted but don’t underestimate your costs to achieve this.
- Within the time frame chosen take note of the expenses made, then at the end of each period compare actual expenses to the budget made.
- Take note of the percentage spent on each expense group, then adjust the next budget to fit desired financial plans
- When income changes, the budget should be reviewed. For pay rise new items can be added to the expense list or estimates increased. For pay cut, less important expenses can be removed or reduced.
Conclusion
The purpose of writing a budget is to guide ones expenses and take control of one’s spending. Although a car without a steering will keep moving, it would move in a direction that increases its odd of having an accident. A desirable outcome requires patience, discipline and self control. Preparing a budget is the first step, sticking to the budget and implementing it is of uttermost importance.
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