Most people will look at the title and think budgets are only for accountants or the Minister of Finance or businesses, BUT everyone and every institution requires a budget. Perhaps let’s begin by defining it so that it’s use immediately becomes apparent.
Simply put, a budget is a spending plan for your money. It considers your income and expenses to quickly give you an idea whether or not you will be able to afford all the things you need to do and perhaps those you would like to do as well. As you can see from this definition, it’s apparent that we all need to ensure we understand how to work with budgets otherwise we may find ourselves unable to afford our desires and ambitions or worse our basic needs – food, shelter, clothing etc. Without a budget it becomes difficult to prioritize what to spend money on and this is why you find some people out partying this weekend but completely broke and desperate the following weekend. A budget needs you to be completely honest without yourself… If you can’t trust yourself to create an honest budget, you can always seek the help of a qualified accountant to help you create a reasonable budget for your specific circumstances.
For those that would like to learn how to create a simple budget for their home, this is the article you want to read and understand so that you can enhance your financial portfolio. Obviously a healthy portfolio means you can do more of those necessary things and leisurely desires.
Most of us in Zimbabwe don’t have a constant flow of income every month to meet our needs and desires; this applies to the rest of the world too. That finite income compared to infinite desires necessitates budgeting. Now that we have defined budgets, let’s dive into the concept of budgeting… No no no it’s not about an accountant with reading glasses and heaps of financial statements. Budgeting is simply the process of creating a plan to spend your hard earned money.
To create a budget you will need a computer with spreadsheet software or the traditional pen and paper…
Budgeting – 5 Steps To Create A Budget
Step 1: Set Some Goals
Note down your short term. midterm and long term goals. Short term goals could be purchasing an appliance like an iron, midterm goals could be taking a family vacation while a long term goal could be paying off a home or purchasing a home. Understanding your goals is critical is helping you spend your money and prioritize on expenditures. It also helps you plan for seasonal expenditures and give you foresight into upcoming expenditures that may need long term planning.
Step 2: Identify Your Family Income and Expenses
Don’t take it for granted that you actually know how much you earn on a monthly basis. Note down all your streams of revenue and you may be surprised that you make more than you thought. That’s the easy part! Now you need to jot down all your expenses; remember we said be honest with yourself. Write down every little item you spend your money on. This may be difficult to cover everything at once so some items will become apparent over a few weeks of observing and tracking where your money goes. Again you will be surprised when you realize just how much you are spending on “unnecessary items” that you can do with less or completely do without. Don’t celebrate just yet because the process of financial freedom is just beginning.
More examples of expense categories: Debt Payoff, Car, Home Utilities, Food, Healthcare, Clothing, Personal Care, Tithes and Giving. You can think of others…
Step 3: Separate Your Family Needs And Wants
At this stage it’s critical that you clearly understand what you need versus what you simply desire. Ask yourself questions in relation to your goals you set earlier; that can help determine the things you need to get you closer to your financial goals as opposed to the things you mistakenly classify as need but do not progress your family financial portfolio. This stage also will give you a good idea on your level of impulse spending; the worst enemy for anyone trying to better manage their finances. Some of the questions you might ask yourself here could be whether you spend on the more affordable items you need or you often go for the more expensive flashy choice?
Step 4: Design Your Budget
This is not the final step but this is where you now put all that information above into an organized manner to effectively show you how to live within your means. Compare your income versus your expenses and if your expenses are hire then you need to ascertain where to cut spending so that you are not immediately planning to spend more that you will make. Ideally you want to spend less that you make – actually you want to spend a lot less. You cannot achieve financial independence if you are spending more that you make because it means you are getting yourself into debt. Yup, DEBT is ugly and budgeting helps you avoid digging yourself dipper into debt. Financial independence means being debt FREE.
Ensure your budget allows for you to save or invest some money. Don’t spend everything you make. Most people think saving is for rich people but no no no… IT’S FOR EVERYONE!!! You can’t get rich if you don’t save and invest. You can’t save and invest if you are spending everything you make or worse, spending more than you make. Give saving a try and see how liberating it can be. Start with a small figure like 5% of your gross income. Do this for 6months to a year and see how that improves your ability to grow your financial portfolio. We will in future publish an article on how to more effectively save…
Step 5: Put Your Budget Into Action
Now that you have a spending plan. It’s time for you to practice what your budget states. A budget is not a static tool… It will require your close monitoring and adjustments along the way as you compare your budget to your actuals. In some cases your budget needs adjustments for it to be more realistic and in some cases, most cases, you need to adjust your habits to conform to your budget (your spending plan). Keep a close eye on your actuals versus your budget and don’t be afraid to compare with others and get help to ensure that you are getting the most out of your budgeting process.
We will share template budgets if enough people require them from us. Share this article with others and tell us, in the comments, how this information has helped you include a budget in your life and better manage your personal finances.
Don’t keep all your money in the one bank account. Use a checking account for your spending, a savings account for your short-term savings, an investment account for your mid-term savings, and a retirement account for tax-deferred, long-term savings. This approach will help you to access the appropriate money in the right place when you need it, both in the present and the future (long-term).
Ottawa University Graduate in (Honors) Accounting. After attaining a few accounting designations and proving to myself that I can pass exams at the highest levels, I now chase after my biggest dream – HAPPINESS! My passion is progressing my community through online technologies and giving an opportunity to AIDS orphans in Zimbabwe…