How to Set Up a Budget: A Simple Guide

How to Budget

Budgeting? That is a tough one. We sometimes wish we had a bottomless load of cash to just spend and not have to worry about anything. But unfortunately, we do not have at the moment. Even business and Multinationals have to budget otherwise they may end up not having any profits at all and realize their expansion needs.

Why do you need to budget?

A budget is one of the ways in which you stay on top of your money matters and also control your finances.  With a budget, you are able to know what amount of money goes in and out of your household.

With a budget, you are able to get out of living from paycheck to pay check. Your budget will enable you to sort out your money priorities and also find the balance between spending and savings.

With a budget, you can be able to pay off your loan, other big bills such as medical insurance premium when they fall due and also save up for a holiday or even big purchase.

How to create a budget

In one of my previous articles, when I was talking about how to help you save more money, I talked about setting up a budget. So, what are the various steps that you can use to create a budget that is simple and easy to follow?

1 Determine your monthly income

To set up a budget, you will need to determine how much you make. Be it weekly, monthly, quarterly or annually but the annual income might be a little bit ambitious.

So, list all sources of income that you have down. Do not be tempted not to list anything. This will include your employment income or business income, rental income, freelancing income, income from a side hustle. Right it all down and how much you make from it.

This amount you make is where the expenses will be reduced from.

If there is one step you cannot afford to not be honest is this step. So, do your best to estimate that income for this month. If your income is inconsistent, take an average of your last three months and use that as your income.

I will give an example:

• ·         Employment income KES. 35,000
• ·         Karaoke hosting gigs KES. 30,000
• ·         Commissions from handbag broking KES. 10,000

2: Sum up Your Fixed Monthly Expenses

List those monthly expenses out and do not leave any out.

You will need to start with fixed expenses (non-discretionary expenses). These are the bills that you have to pay. They include: Rent/mortgage, water bills, groceries, car loans, student loans, cooking gas, electricity bills, pay TV, WIFI subscription, etc., list them all out

You not sure what your expenses are like, have an honest discussion with yourself and list them all out, look at your MPESA transaction, look at your bank transactions for the last one to three months and list all out. The reason you need to do this, you will find a pattern of your expense and list them out.

E .g

·         Rent- KES. 8,000

·         Electricity/tokens-KES.400

·         Groceries KES. 3,000

·         HELB KES. 2,500

·         Transport -4,000

Break out all those expenses here. This will help you to be on track.

3: Set your Financial Goal

I know by now you ask yourself, why I haven’t listed that Tuesday pizza offer, or that nice bottle of whiskey you like getting yourself every month. Yes, I know. We shall get there.

Take a minute and pause and think about your financial goals.

What will your financial goal help you do? It will help keep you in check and also help you prioritize what is important to you.

Write that goal down. If you have never written down a goal before or even set a goal before, this is the place to begin. What do you see your financial life looking like? Do you want to be wealthy? Do you want to be financially happy? Do you want to be free of debt? Think about where you want to be and where you are now. What do you see?  After that determine what your financial goals are like and classify them into short term this should definitely include your budget, medium term, and long term.

E. g of these financial goals can be:

• ·         To get out of debt
• ·         To build your emergency fund
• ·         Fully funding that retirement plan you have
• ·         Saving for that down payment for your house or car.

Think about your financial life needs and write them down.

Now that you have written down those goals down, now you will need to condition your mind to think of them as expenses. Hence, what will your step 2 look like:

• ·         Rent- KES. 8,000
• ·         Electricity/tokens-KES.400
• ·         Groceries KES. 3,000
• ·         HELB KES. 2,500
• ·         Transport -4,000
• ·         Retirement plan KES. 3000
• ·         House and car down payment KES. 7,000

4: Determine your non-fixed expenses

These are the expenses that you are paying for but not really so essential. Things like entertainment, eating out, vacations, hair, and beauty etc.  These are not fixed and not essential but can be adjusted based on what you can afford

So, your expense will build into something like this:

• ·         Rent- KES. 8,000
• ·         Electricity/tokens-KES.400
• ·         Groceries KES. 3,000
• ·         HELB KES. 2,500
• ·         Transport -4,000
• ·         Retirement plan KES. 3000
• ·         House and car down payment KES. 7,000
• ·         Hair and beauty KES 2,000
• ·         Eating out+ Pizza Tuesdays KES 2,000
• ·         Others KES. 2,500

5: less your expenses from your income

After doing some soul searching and probably pitching yourself, the next step is to lessen your expenses from your income

.

Congrats if you get a positive number. This means that you are making more money that you are spending. With this, you can now make adjustments to your budget if you would like to. You can decide to allocate more to savings or paying off the loan.

If you break even, this to mean that expenses are equal to your income with no extra cash, you will need to adjust the budget so that you can get some margins for the fixed expense area.

If you get a negative number, it means you are spending more money than you are making and that is not good. Therefore you will need to make adjustments by increasing or decreasing your expenses or find a way to increase your income.

This might mean not going on holidays and weekends out of town to get that figure up to a positive number, then that is what you do.

6: Implement, monitor and adjust your budget.

Like any project management professional will tell you, after doing research, finding the variables and thinking of the goals, the next step they do is to implement, monitor and just them variables until they get to the desired goal.

Implement this and monitor the budget, make them necessary adjustments and see how it pans out.

You can even plan to have a budget meeting with your spouse or better half and see how the budget is working out. Check it out, recalculate, and readjust where necessary. You do not need to do it every day. You can set two days every month and see how this goes.

To help you do all this planning and also budget, automate some of these ways to help you reach a good place. Automate your savings to them retirement plans, life insurance, just to mention a few.

Remember, if you did not have a budget before it might be rough or if your budget is on the negative side.

Keep at it and do you shall be achieved.