For many of us, we will hear the happy ‘pings’ of credit alerts this week. Yay payday! Now, before you rush off and spend it all within the first ten minutes of its arrival, answer this: do you have budget? We know you have all your expenses for the month safely tucked away in your head ready to be serviced by the oh-so-anticipated salary. However, have you sat down to draw up a budget for the month that goes beyond bills and debt servicing to preparing for your future?
If you haven’t, what are you waiting for? We know you have heard it from just about every financial adviser out there that it is important to have a budget and stick to it; but maybe you need to hear it one more time. Budgeting is essentially the holy grail of all financial planning. It gives you a clear picture of your current financial status, your spending habits and whether or not you will depend on your children’s goodwill in your old age. With a budget, you see your inflows, outflows, leakages, acts of self-sabotage and where all of that is taking you when the time comes that you can no longer work for money.
Still, we know you might need convincing, so we’ll show you the benefits of budgeting with this scenario:
Ayobami was on Instagram the other day when she stumbled on a travel agency’s ad for a trip to Zanzibar in April 2020 for N400,000. The fee would cover transport, accommodation, tourist attractions and all. Of course, she thought it was an amazing deal and immediately got excited. She was tempted to find someone to tap as a sponsor but the voices of her twitter feminist comrades rang repeatedly in her head so she decided to see how she could fund it herself.
With a monthly income of N170,000, her first thought was how improbable the trip would be until she started to write things down. She listed all her expenses in one column of an excel sheet and deducted the amounts income. Essentially, created budget that showed her that with some adjusting and discipline, she could squeeze out N30,000 every month for this trip with a little extra in December when 13th month salary would drop.
So, what did this simple exercise do for her:
- It created a prize she can look forward to as a reward for discipline. For the next several months, every time she wants to spend money on something that is not in her budget, she is faced with the reality of forfeiting her Zanzibar trip.
- It exposed her to the truth that she needs to increase her earning capacity. To live the life that Ayobami would really like to live, she needs to earn more. At N30,000 every month, she needs to save for 13 months to go on a N400,000 holiday; what happens when she wants to buy a N2m car. If she wants to be able to afford things more readily, she needs more money.
- It helped her identify her spending habits, where she needs to spend less and what she needs to pay closer attention to. For instance, in outlining her expenses, she may realize that she is spending close to 40% of her income on servicing debts. Perhaps she borrows to buy cosmetics, clothing, hair or maybe even rent. That really isn’t the best move. Especially when she still needs to build up emergency savings AND save for retirement.
If by now you’re thinking a budget is a critical part of your financial journey, you’re correct. To start, borrow a leaf from Ayobami’s playbook and itemize all your expenses (needs, desires and commitments) for June with the corresponding amount. Match this against your income and adjust until you get to a comfortable position.
In our next post, we will tell you all about great methods for creating a good budget.