By Zandra Gomes
Why Budget?
As young adults, we all have financial goals, both short term (such as a travel trip) and long term (such as buying a car or house). In order to achieve these goals, we have to obtain sufficient funds, often done through savings.
A budget gives you a structure for your spending by identifying how much you should spend on various items (based on past spending habits and realistic adjustments) and once you stick to your budget as best as possible, you are less likely to make unnecessary purchases and more likely to achieve your desired savings goals.
Realistically speaking, not everyone is able to save monthly as they may not have any excess funds after they pay their expenses. However, this does not diminish the importance of tracking and analyzing one’s expenses as it may reveal potential ways to cut spending and start saving. Saving something, regardless of the amount, is a start and always better than nothing.
How to create a Budget
- Identify your disposable income
If you earn a fixed income, this is the amount you have after you deduct PAYE, HSC and NIS from your salary. It reflects the true amount of income you have to spend or save.
- Track your expenses
Regardless of if you have a fixed or irregular income, tracking your expenses is important for you to identify what you are spending most of your income on and where it might be easiest / most feasible to cut back if necessary to meet your saving goals.
To do this, record every purchase you make, its value and whether it is a fixed or variable expense (Fixed expenses refer to your regular monthly bills such as rent and car payments. Variable expenses refer to those that change monthly such as food/groceries and entertainment) for a period of time, 2 months recommended.
Upon completion of this exercise, use your past spending habits (as documented) to identify how much you are expected to spend monthly on various expenses. You can further break down your expenses into wants and needs.
Tip: Be honest with yourself in differentiating your wants and needs.
- Establish your goals
Create a list of all the financial goals (both short term and long term) that you’d like to achieve. These goals don’t have to be thoroughly detailed or set, but identifying your priorities and average amount that you would need to save monthly in order to achieve your desired goals before creating a budget will be useful.
Tip: One of your short term goals should be creating an emergency fund.
An emergency fund is money set aside for unexpected expenses such as medical bills, a big car repair or rent if you get laid off. You can allocate savings towards this fund monthly until you reach your goal. As a general rule, your emergency fund should cover at least three months’ worth of your expenses.
- Make adjustments to your forecasted expenditure.
Now that you have documented your income and forecasted spending, identify how much excess funds you will have to allocate towards your savings goals. If your excess funds do not meet your savings target, look for areas in which you can cut back spending, starting with your variable expenses that you’ve classified as wants such as entertainment, eating out and clothing. Make these adjustments to your forecasted expenditures.
Tip: Minor cost reductions can accumulate to great savings overtime so don’t overlook the little things.
For example, meal prepping on weekends and carrying your own food to work for 3 days instead of buying lunch at work daily can reduce your annual food expenses significantly. Similarly, substituting brand named products with cheaper alternatives at the grocery store can help you cut your grocery bills. You don’t have to make major lifestyle changes to cut back costs!
- Create your budget
There are many variations of how a budget can look, but they all have the following components in common:
Income – Your forecasted disposable income
Expenditure – List of items and your target expenditure on each.
Savings –the amount you seek to save monthly. This can be further broken down into funds for your short term goals and long term goals.
After creating your budget, keep tracking your expenses to ensure you are staying on track with your budget.
Tip: Be realistic
Don’t budget to spend half of your current monthly expenditure in order to meet your ideal savings goals. An unattainable budget is a useless one. Also, a budget is meant to monitor your finances, not deprive you of all good things in life, so make sure to include your nights out and other leisure activities, just in moderation.
Tip 2: Don’t compare your budget to others
There’s no “perfect” budget and everyone’s budget will vary based on their income levels and personal spending habits. While you can use recommended ‘saving to spending ratios’ and other savings advice found online as guides, don’t be demotivated if you currently cannot achieve these ratios. What’s important is that you start and you know where you want to reach.
In closing, remember that your budget is your goal. It’s quite likely that some months you will be unable to stick to your planned spending due to unforeseen and uncontrollable circumstances. Nonetheless, having a guide of how much you should be spending is very important and if you work towards sticking to your budget, you’re much more likely to achieve your desired savings goals, and ultimately be able to afford the things you want in the future.
Below are some easy budget templates found online to help you create your budget and track your expenses:
https://www.vertex42.com/ExcelTemplates/simple-budget-worksheet.html
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