Personal Financial Planning – Managing Expenses (VI)

Last week, we discussed a few more specific measures of managing expenses. Today, we will take up factors to consider in drawing a budget that will help us both manage our expenses and achieve our long-term financial goals. Budget: About four weeks ago, we introduced budget as a tool for planning for immediate and long-term […]

Last week, we discussed a few more specific measures of managing expenses. Today, we will take up factors to consider in drawing a budget that will help us both manage our expenses and achieve our long-term financial goals.

Budget: About four weeks ago, we introduced budget as a tool for planning for immediate and long-term financial success. Part of what a budget does is to help us control our expenses and get the most value from each spending. It also helps us manage and pay out any debts we may owe, reduce emotional strains due to financial stresses, build our confidence and prepare us for emergencies.

Our budget should be a written plan of how we will spend (expend and save/invest) our incomes over a period. Usually, it is drawn on a monthly basis for one year. Budgets for more than a year are possible depending on our planning horizon and perspectives. Regardless, the budgeting process would include:

1.Identifying our priorities, goals and objectives over units of time

2.Creating a budget document that outlines our estimated monthly incomes and expenses

3.Tracking our actual spending and income vis-à-vis our targets

4.Making adjustments to the plan based on emerging situations and realities

5.Building the discipline to live by the budget

How do we build and make use of a budget to help us manage our expenses and achieve long-term financial goals?

• Set realistic but stretch goals: The first thing is to set out your financial goals in terms of what you need to achieve on a daily basis, in the near term and in the long run. These different objectives must dovetail into one another reasonably neatly. They could, for instance, include meeting your feeding needs, transportation to work or business, short-term debt repayment, long-term investment targets, etc. Don’t be scared of thinking through and writing down what you want to achieve, no matter how ‘lofty’ they might seem. Often, the moment we summon the courage to think through these matters clearly and write them down, the less we begin to fear them, and the more we can begin to map out practical ways we can work to achieve them.
• Choose a budgeting method: There are several personal budgeting methods and models. It is important to choose one that is easy and works for you. An oft-suggested model is the 50:30:20 budget. It is simple to understand and draw up into a plan. It works by breaking down your fixed and variable expenses into the things that you need to have and those that you want to have. If, for instance, you have to commute to work every day, then your transportation cost to work is a necessity. On the other hand, taking the family to lunch every weekend might just be a want that you may or may not be able to afford. Making the classifications into needs and wants is required so that you can identify opportunities for savings and investments that will make it possible for you to achieve your long-term financial goals.

With the classifications made, your income is then divided into three in the ratio 50:30:20 for needs, wants, and savings, respectively. Obviously, these percentages are not sacrosanct, and you can adjust them to fit your situation. For instance, a person making N3 million monthly income can afford a higher savings/investment ratio than a person making N800,000.00 per month, all other factors remaining the same.

• Be clear about what your income and ‘expenses’ are: Budgets are basically about our incomes and expenses. The term ‘expenses’ is being used here rather cautiously to include all outlays, some of which would technically not be classified as expenses, such as savings and investments. Whilst variables such as inflation, our individual responsibilities and income levels would impose limitations on what we can do over a period, we should imbibe the discipline of savings and investments. Typical expenses such as payment of domestic utility bills, social transportations, etc., do little in helping us build long-term wealth. What makes it possible for us to be wealthy is making wise investments over time. Let’s take this seriously and plan to do it if we aren’t already doing so.
• Monitor and adjust your spending: We have to devise a system of capturing and recording our outflows, both on the various classes of expenses as well as any savings and investments. This should be done on a periodic basis to ensure that we are within our budget. With various recording applications and tools freely available and at our disposal, we shouldn’t have any issues tracking what we are doing. At the end of a period, we should take a look at positive and negative variances. We should try to understand why the variances occurred and do what may be appropriate depending on what the causal factors and contingencies might be. The variances would require that we make adjustments as may be necessary or appropriate. With iterations over time, our budgeting skills will improve, and we will get better both at making financial projections and controlling our finances.
• Be disciplined! Besides developing a budget, we would need to inculcate personal financial discipline to live within it. Obviously, we would falter and fail here and there, but we must be able to stick to our plans substantially in ways that our human failings do not derail us off the track of financial success. We can build financial discipline not so much by trying to take major steps all at a go, but by gradually taking simple but fundamental steps.