What is a Budget?
When you begin making a bit of money, it would be important to start managing what exactly is flowing in and out of your pockets. A budget provides you with a much needed perspective on what you want versus what you need.
A marketing study in 2012 showed that young people, in particular, students, are spending more and more on discretionary products such as clothes, gadgets, entertainment and snacks every year. Having a budget helps keep such instances in check by preventing you from making any impulse purchases.
Budgeting is the process of creating a plan to spend your money. This spending plan is what is referred to as a Budget. It ensures that you balance your expenses effectively with your income. If you spend more than you make, then you have a problem. You are supposed to use your budget to effectively control your spending and save. This shall help you map and align your resources with your short term and long term financial goals.
How Do I Create a Budget?
There are five basic steps towards the creation of a budget:
- What are my financial goals
A financial goal is a target that you set for yourself to achieve through proper management of your financial resources. Set your financial goals and categorize them into short, mid and long term goals. Every goal you make should be SMART, that is, Specific, Measurable, Attainable, Realistic and Time-bound.
- Where is my money coming from
List your sources of income and the amount that comes in from each source every month.
- Where is my money going
Map out all your expenses on a daily basis. Categorize each item you are spending on into the following:
- Fixed Needs: This are necessary expenses that stay the same from month to month such as rent and electricity or telephone bills.
- Variable Needs: This are necessary expenses that vary from month to month such as fuel and food.
- Wants: This are nonessential expenses such as coffee dates, movies and eating out.
NOTE: You should have a monthly savings goal and this should be included as an expense on your budget. Some budget templates are available online on the following platforms:
- Add it all up
When you compare your income and expenses, see if you have any surplus or deficit. If you have a surplus, Congratulations! You are living within your means. If not, you will need to make changes to your budget.
- Make adjustments if you have a deficit
If your expenses exceed your income you need to find a strategy for controlling costs. Here you begin to eradicate the wants portion in part (3c) above. It will also be helpful to develop some tips on saving money.