Budgeting: A Guide to Take Charge of Your Finances.

Budgeting puts you in charge of your money. By helping you take control of your finances, you can easily achieve your financial goals. Whether you are saving for a big purchase, living expense or paying down debt, a well-constructed budget can help you put your money to work. The trick is to figure out a budget that works for you. Here are some essential tips to help you get started with effective budgeting.

Calculate Your Net Income.

To create an effective budget, you need to know your income. Your net income. That’s your total wage or salary after deductions, including taxes, pension, and medical cover. In short, it’s the money that’s deposited in your bank account every month.

Sometimes when we get a job we only fixate on the total pay. The gross income. And we end up building castles on how to spend it because we assume all that money is ours to spend. Only to get a rude shock on payday! Also, if you are self-employed, a freelancer, or a contractor, and your income is irregular; it is essential to keep detailed records of your income statements and payments.

If you receive tips and commissions, your net income will likely vary each month. If this is the case, it’s best to calculate your income based on a worst-case scenario. Review your lowest paycheck from the last six months and use it as a guide to create a budget.

Set Clear Financial Goals.

What do you want your money to do for you? Clarity. It is the beginning of everything. Therefore, you need to set both short-term and long-term goals. What do you want to accomplish in a year? That falls in the short-term category. Perhaps it is building an emergency fund, paying off debt or saving for a girl’s trip. Either way, these goals should be clearly stated, as they will provide a sense of direction while budgeting.

What are your financial goals over 5-10 years? Things that require more planning and can take years to achieve fall in the long-term category. It could be creating a fund for your child’s education, buying a house, or saving for retirement. Whatever your long-term ambitions may be, they should be reflected in your monthly budget.

Track Your Spending.

Once you know how much money you have coming in and your financial goals are clearly stipulated, the next step is to understand where your money is going. How are you spending your money? Categorise your expenses and track it. This is data collection. It can help you determine where you are spending the most money. It also shows you where it might be easier to save. The more data you collect, the better.

For several weeks, record all your daily spending. There are several tools, such as spreadsheets, online templates and apps, that can help you in this activity. At the very least, you also have a pen and paper, write down how you spent your money every day. It is a really eye-opening activity. Liberating too. As your spending patterns get revealed.

Itemise your spending into categories such as eating out, food and groceries, rent, entertainment, gifting, and charity. Then separate your monthly bills, such as rent and utilities, from variable expenses, like gas, entertainment, and groceries, which change from month to month. It is in the variable expenses that you can find opportunities to cut back.

Differentiate Between Needs and Wants.

You’ve seen how you spend your money. Now it’s time to sift through the mud. You need to prioritise essential expenses over non-essential expenses. Essential expenses are the must-haves—your monthly needs such as rent, transportation, groceries and utilities.

Once you’ve accounted for the basics, consider what non-essential items you can cut back on to save more. Your wants. You don’t have to eat out every week. Review your subscriptions and keep only the essential ones. Also, you can tap into indoor entertainment and enjoy your own company. Being mindful of the difference between needs and wants can free up extra funds for your financial goals.

Choose a Budgeting Method.

There is an array of budgeting methods. Just find the one that suits you and your financial goals.

• 50/30/20 Rule: This is a good starting point for putting your plan into action. It is the most popular approach since it’s pretty straightforward. You allocate 50% of your income to your needs, 30% to your wants and 20% to saving and debt repayment. Of course, you can adjust the percentages to fit your situation. For instance, if you live in the city and the rent is high, your needs percentage may be slightly higher, or if you live in the countryside and your rent is manageable, your needs percentage may be slightly lower.
• Envelope Budget: This is ideal for individuals who struggle to manage their spending and also spendthrifts. Have an envelope for every category. Then every month, put in the budgeted cash. When the envelope is empty, wait till next month to spend in that category. Using cash payments helps people control their spending.
• Zero-Based Budget: This is an excellent method for individuals with a fixed monthly income and a comfort level with meticulous record-keeping. In this method, every shilling you earn is assigned a job such that your income minus expenses equals zero. This method encourages careful planning of every coin.
• Pay yourself first budget: This method is excellent for people who want to save more. People who don’t want to deal with detailed record keeping and are confident they can cover their necessities. It works by setting aside a predetermined amount in savings before paying any bills or making purchases. Only after that, do they pay for the bills and necessities and what’s left goes into your wants.

Try To Stick to It.

Budgeting gets a bad rep, and many people try to avoid it. It is not the evil warden that wants to make your life miserable. On the contrary, it is possible to create a budget that appeals to you and you stick with it.

Therefore, if you enjoy the finer things in life and don’t mind indulging occasionally, create a budget that accommodates this. If you like to save money for rainy days, add that to the budget too. Let your budget be a tool that helps you navigate your life. Let it free you and guide you towards your personal goals.

Monthly budgeting is crucial, as budgets fluctuate from one month to the next. Therefore, you will be required to create a budget every month and again, budgets can only help you if you stick to them. If you are required to make adjustments to your life, then do so. Remember, even small savings can add up to a significant amount of money.

Review Your Budget Regularly.

Your budget is not set in stone. The principle is set in stone, but your needs and wants may vary from time to time. Therefore, it can be changed and reviewed as regularly as you want. Sometimes, life happens, and you end up using all your money to get out of a rough patch. At other times, you receive a salary increase and can afford several of your wants. Flow with life’s currents and adjust as needed.

The Take Away.

Remember, a budget is a flexible tool that should work for you and not against you. It may take a few months to find the right approach and adjust to new spending habits, but the reward of financial control and progress is worth the effort.