How to Create a Budget

Hello and how are you doing? Are you counting down to the weekend? 

A few weeks ago, we wrote on Starting Back At One in the new year. Today, we will take it a step further. What do you do after writing down your investment goals and the steps involved? Create a budget.

Some people have a love-hate relationship with budgeting. To them, a budget means there is no room for the finer things of life. For others, it’s simply a fear of numbers. Yet for others, it’s the nagging fear of having to confront poor spending habits. 

You can summarise your financial transactions into two halves—inflow and outflow. Inflow is the easier half. Most people have a rough idea of how much they earn, be it paid employment or self employment. 

Where things get fuzzy, however, is the spending part, especially in the beginning of the year when so many expenses pile up. Even those who work from home are not left out because these expenses tend to creep up on them.

So how does one budget? Where should one start from? Essentially, you can split your spending into three broad segments: Needs, Wants and Investments. 

Needs are things that you absolutely cannot do without. Take food for instance, the average Nigerian spends nearly 50% of their income on food. Food is therefore a necessity. Shelter is also a necessity—you need somewhere to lay your head. Upkeep for family and friends who are dependent on you for a living is also a necessity. 

The next segment is your wants. These are items that you can do without, even though they make life quite comfortable. For instance, the money spent on hanging out or going on your annual vacation belongs to this bucket.

The last segment centres on the money spent on investments. It could be short-, medium- or long-term investment.

There is no hard and fast rule when it comes to preparing a personal budget. A common rule is the 50:30:20 rule: 50% on one’s needs; 30% on wants; and 20% on investments. You also have the 40:30:20:10 rule: 40% goes towards one’s regular monthly expenses; 30% on wants; 20% on short-term investments; and 10% on long-term investments. 

An extreme rule (but one that works fine for those in the high income bracket) is the 70:20:10 rule, where 70% of one's income goes towards investments, 20% on needs and 10% on wants. 

Regardless of the formula you choose to apply, consistency is what matters. Consistency does not mean you are perfect. It simply means that you are staying on that track most of the time. 

You only need 30 days to stay consistent until it becomes a habit. If you struggle with budgeting, then our budgeting template would be of great help to you. You can get it here

Have a great day??