Ingredients of Effective Budgeting

Among the benefits of an effective budget is having more control over your finances and being better able to predict your future.

An effective budget will include:

- a list of expenses and income,

- the timing of expenses and income, and

- show how any gap between the two will be financed.

01 Record

It is important for effective budgeting to record your income and expenditure properly. Here are two tips for keeping track of what you earn and what you spend:

1. As far as possible, pass your full income through a bank account and pay your bills via debit card or direct debit. This way you can look back at your bank statement at the end of a period and check what came in and where it went out.

2. The envelope approach can be used by those who prefer to spend cash. This approach includes separating your income into envelopes with cash dedicated for different areas of expenditure.

02 Plan

Luke 14:28-30 says, “suppose one of you wants to build a tower. Won’t you first sit down and estimate the cost to see if you have enough money to complete it? For if you lay the foundation and are not able to finish it, everyone who sees it will ridicule you…”

This text encourages the assessment of the cost of what is desired and whether there is enough money to finance it. This assessment will help you to plan.

The cost you arrive at must be based realistic and supported by reliable experts. After determining the cost, you need to see if you have enough money, which means you must determine your disposable income and savings.

Record keeping will help you in this stage as you will have more information to work with to develop a plan.

03 Save

There is an African saying that goes, “don’t eat with 10 fingers.” The fingers symbolize what you are capable of, and the parable is saying don’t use up all you have. In other words, don’t spend everything you earn. For example, if your income can afford three patties, buy less. If your budget suggests that you can afford a $200,000 mortgage, don’t take on a mortgage of that much, take on one for less. In spending on less so that you have something in reserve.

Saving by contributing to an approved retirement scheme or approved superannuation scheme is very tax efficient, as your contributions would be tax deductible, and the income on the investment will be compounded tax-free while it remains invested. Having a plan will put you in the best position to save.

04 Prioritize

One way to ensure that your budget balances is to avoid impulse spending and instead prioritize all your needs.

• 1st priority is to save 5% to 20%, everything else must fit within the remainder.

• 2nd priority is getting back-to-work, which includes lunch, transportation and clothing for work. Please consider restricting your back-to-work expenses to between 5% to 10% of your income.

• 3rd priority is to provide for your basic needs, which includes food and shelter. This should cover your mortgage or rent, your grocery or market bill and all your utilities. Please try to keep this allotment between 50% to 60% of your income.

• 4th priority is to add other priorities like investing in personal development through education before entertainment.

05 Finance Wisely

Even with our best efforts, we may find ourselves experiencing shortfalls and may look to borrow to finance the gap between our income and expenditure. Borrowing should not be a problem if we ensure that we match the repayment time of the debt to the time it will take us to consume what we are using the debt to finance. For example, a house lasts more that 30 years, hence a mortgage for over 30 years can fund its purchase. A car that lasts more than 5 years, can be financed by a 5-year bank loan.

Mismatching the duration of consumption with the duration of repayment is a sure way to create imbalance in your budget. For example, it is unwise to use a 24 months loan to finance a one-week vacation, or use a credit card to purchase a home. Credit card debt or 05 © 2023 short-term loans should only be used when one can identify the source to fully repay it in the short term.

06 Be Accountable

You cannot be accountable unless you commit. So, it is important that after going through the budgeting steps that you make a commitment. It is easier to be accountable with an accountability partner, which can be a spouse, a friend, a mentor, a sibling or your parents.

The information contained in this article does not constitute legal or other professional advice or an opinion of any kind and is intended for general information purposes only.