Budgetting Series 1

Despite my extensive involvement in finance for over a decade, I must admit I only began budgeting a few years ago. In the course of my career, I prepared budgets for multi-million dollar transactions, businesses and projects but didn’t have one for my few pennies. I had a mental picture of my ins and outs and felt that was adequate. However, I was constantly indulging in excesses and never had enough to set aside towards investments despite the fact that I was earning a good salary and had extra income from my various side hustles. Every now and then, I would spend money on random items that I really didn’t need. Ever since I began my love affair with budgeting, my life has never been the same. As a result I have been able to cut out excesses and unnecessary expenses and have been able to make some investments.

The next couple of articles refer to the dynamics of budgeting, why it is important and how to budget. Creating a budget for your business is similar to creating a personal/family budget. However, for the purpose of this series, I would focus on personal/family budgets.

What is a budget?

A budget is a blue print for achieving specific goals. In simple terms, it is a list of your likely income and expenses for a given period. It is a tool that helps you understand your inflows and outflows and helps you determine your financial health or condition.

In a personal or family budget, all sources of income are identified and expenses planned with the intention of matching the inflows to outflows. These include fixed expenses, monthly payments such as medical expenses, food, clothing, recreation, savings and investments etc

Why is it important to budget?

Scenario 1: After a very expensive Christmas holiday, Zainab’s car developed a major problem and her mechanic informed her that the engine needed to be replaced. She hadn’t planned for this expense and had to borrow N300, 000from her close friend, Tutu, inorder to buy a new engine for her car.  After six months, Zainab had not repaid the loan. Zainab only earns N200, 000 a month and just couldn’t fathom how she could afford to repay Tutu with all her current monthly expenses. She basically lived from one pay day to the next. Zainab then set a goal to repay the loan within six months and decided to prepare a monthly budget. As a result, she was able to itemize and prioritize all her expenses. She was also able to cut out unnecessary expenses and realized she was able to set aside N75, 000 every month towards offsetting her loan with Tutu. Within 4 months, Zainab had repaid the loan and wished she had prepared a budget from the beginning as she would have repaid the loan 6 months earlier. Based on her new discovery after she had repaid the loan, Zainab continued to set aside N75, 000 on a monthly basis and was able to purchase a plot of land within a few months.

 

To be continued……………..