Retirement planning – Budgeting (III)

Before my ‘Letter to a Friend’ last week, we covered what a personal budget is; its purpose, benefits and types. We also covered the principles and processes of budgeting. Today, we will try to provide the basics of developing a personal budget. It is important to understand the difference between a personal budget, a personal […]

Before my ‘Letter to a Friend’ last week, we covered what a personal budget is; its purpose, benefits and types. We also covered the principles and processes of budgeting. Today, we will try to provide the basics of developing a personal budget.

It is important to understand the difference between a personal budget, a personal cash flow projection and a statement of net worth. We define a personal budget as an income and spending plan drawn based on our financial realities and plans for what we want to do and achieve over a defined period. It is aimed at bringing out to what extent, or not, our incomes and revenues cover our planned expenses and investments.

Akin to a corporate statement of affairs, a personal net worth statement depicts an individual’s financial position at a point in time. It brings out both the details and difference between what we own and what we owe. To calculate our net worth, we first add up all our assets, such as land, vehicles, shares, cash, etc. Let’s call that our ‘Total Assets’, ‘TA’. We then add up all our obligations such as consumer loans, student loans, etc. Let’s call that our ‘Total Liabilities’, ‘TL’. Our personal net worth, NW, is calculated as NW=TA – TL. 

Sometimes, there is a mismatch between when we expect some income and when it actually comes in. It is the same thing with expenditure as regards when we incur an expense and when we pay for it. Cash flow statement projection forecasts when income is received and expenditure is incurred. A cash flow projection aims to predict when funds will arrive in your account and expenses/investments paid for. Typically, incomes such as salaries tend to come into our accounts in reasonably predictable quantum and timing. Dividends from our investments, on the other hand, may be a little trickier to quantify and time-track. Whilst our cash flow and budget are different, there has to be an alignment between the two. If your budget indicates that your income falls short of projected expenses, you will need to either cut out some spending/investments or work out how to raise cash to cover the gap. Remember that after all is said and done, we have to pay for everything in cash or any of its equivalents (bank transfers, cheques, etc.).

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Where are you, what do you have, and what do you want to do? Drawing up a personal budget requires a person to be aware of their financial realities, opportunities and challenges. Your stage in life, situation, socio-economic conditions and plans will influence and ‘shape’ your budgeting. For instance, an individual in their early thirties with outstanding student loans planning to get married will have a markedly different budget from a retired person in their seventies who is debt-free and drawing from pension and annuities. 

To draw up a simple personal budget, 

Be clear about the purpose and period: Your budget might be for ‘investment growth’ in a company of your choice for the next ‘twelve months’, say from 1st January 2024 to 31st December 2024. It could otherwise also be about debt repayment. It is important to be clear as to the purpose of your budget and the period it is to cover. 

Establish your opening balances: Capture all opening balances such as cash on hand, cash in the bank, stock of Dangote Cement shares, etc. (Assets such as your Dangote Cement shares would actually be reflected in your statement of net worth only. However, dividends from the shares will be captured in your budget as one of the incomes you are expecting for the year). If you also plan to buy MTN shares this year, then the purchase would be captured in the budget while the shares in themselves, as an asset, after the purchase, would be reflected on your NW statement. The idea of listing out your assets in the budget exercise is to help you bring out possible sources of revenues, including any asset sales and striping as may be required or wise.

Bring out sources of revenues: These will be projected revenues/incomes for each month for the period (twelve) in our example. Revenues might be monthly salary and allowances, annual rental income, dividends from your Dangote Cement shares mentioned above, etc.  Revenues and income are the top line items in your budget. The idea is to capture all sources of revenue and income. 

Identify ‘expenses’: These will be projected expenses for each month for the budget period, again twelve, in our example. Expenses might include groceries for each month, monthly utility bills, annual club subscriptions, annual school fees for the children, etc.  However, ‘expenses’ is loosely used here because we can capture our planned savings and investments under this category in a budget but treat them appropriately in our NW statement. 

Based on the above, a simple personal budget template might look like:

Details                                           Month 

Income and revenue sources:

Monthly salary, ‘a’         Amount in Naira

Monthly allowances, ‘b’         Amount in Naira

Other incomes such as rental         Amount in Naira

income, dividend, etc.,

(each to be captured

individually except where it

is reasonable to consolidate), ‘c’    

Total income (a+b+c) = TI         Gross amount in Naira

‘Expenses’:

Monthly grocery, ‘d’         Amount in Naira

Monthly utility, ‘e’         Amount in Naira

Monthly subscriptions, ‘f’         Amount in Naira

Other monthly expenses/                Amount in Naira

investment plans (each to be 

captured individually except 

where it is reasonable to 

consolidate), ‘g’       

Total exp (d+e+f+g) =T              Gross amount in Naira

Surplus/(deficit) = TI – TE         Net amount in Naira

There are many detailed budget templates on the internet. Many of them can be adapted to meet local and personal requirements. A simple one can be found on https://bit.ly/4cv4KXR. Next week, we will take up peculiar issues for budgeting before and after retirement.