A Step-by-Step Guide to Budgeting

What is a budget?

A budget is an estimation of revenue and expenses over a specified future period of time. It should be compiled and re-evaluated from time to time.

A budget will show you how much money you expect to bring in, then compare that to both your required expenses, such as rent and insurance, and your discretionary spending, such as entertainment or eating out. Instead of viewing a budget as a negative, you can view it as a tool for achieving your financial goals.

Importance of Budgeting

1. It enables you take control of your money. Helps you allocate money to your needs and wants without which you will be spending recklessly.

2. Helps you track and  achieve your financial goals e.g. to pay off debts gradually, increase savings and investments.

3. It opens up  your eyes. You're able to know where your money comes from and where it goes. It helps you to save, plan your retirement and helps you to see what you won't have seen.

4. Helps you to create an emergency fund (safety net). It is advisable to set aside 3-6 months liquid reserve equivalent to your average monthly expenditure for any emergency.

5. Budgeting can help you grow a healthy relationship with family members and other people. You don't become a burden. It is easy to have a good conversation without hard feelings.

6. Makes it possible to create a fund for investment. A good investment is where your money starts working for you as you mind your business.

Questions and answers

1. Is there a way you can help somebody who has a problem of buying things without budgeting?

Learn to sit down with a pen and paper to write a  budget. You may resort not to walk with your ATM and carry only the money you need.  If you've Kshs.70k in your account,  you decide to remove 20k  today and 20k tmrw you'll have used 40k in two days without a budget.

2. I'm paid a net of Kshs.13,500, an advance of Kshs. 3k by 15th. The total net pay is Kshs. 16,500. I have tried to save but it's very difficult. I've a family with two kids.  What can I do?

It isn't clear how much the person saves, what she spends for rent, food etc. However, it is advisable to live within your means; and look for other sources of income.

3. Is a merry-go-round a good way of saving?

You should have a goal or target on what to do. Once your receive your contributions, put it in an investment project.

4. Where can you save an emergency fund?

You should save where you can access the money quickly but the money should be in liquid form. You can put it in your call account for 3, 6 or 8 months where it is not  strictly fixed. You can also put it in a chama account that is well run and managed. The bottomline is that your savings should be easy to withdraw when an emergency occurs.

Simple Steps to Budgeting

1. Setting and writing down  realistic financial goals. You should set short-term, medium-term and long-term goals. It is easier to plan once goals are written down coz the subconscious mind is activated. For example, you can plan to buy a cow worth Kshs.100k by the end of the year and start saving 8-10k per month. 

2. Establish your total expenditure. Write down your needs and wants for the month e.g. rent, insurance, electricity, fare, entertainment fees etc. Track your expenses by recording them. Categorise them into need and wants. Needs include: food, shelter, clothes, water, electricity, insurance,oans, transport, fuel etc. Determine fixed and variable expenses e.g.  rent, electricity, water, cable TV, fees etc. Variables include: food, clothes, transport, electricity, water etc depending on season. 

3. Determine your Income. Write down the sources of income e.g. net salary, business earnings/profit, rent, farming produce, honoraria etc. Hope for the best but prepare for the worst!

4. Compare your Income vs your expenditure.

a. Expenses > Income. Find ways of cutting down your high expenditure so as to match with wlthe income level. 

b. Income > Expenses. This gives you a surplus that can be channelled to savings.  

c. Income = Expenses. A state of equilibrium is attained but still you can lower some discretionary expenses and create another income stream/increase you income level to surpus the expenses.

5. Monitor and record your expenditure

a. Recording what you spend throughout the month will keep you from overspending and help you identify unnecessary expenses or problematic spending patterns. 

b. Take a few minutes each day to record your expenses, rather than putting it off until the end of the month.

Question and answer

1. What type of loan can one take to sustain his/her standard of living?

A loan that is put in income-generating venture.

2. The greatest problem is that we've grown up without being taught about money. The biggest stress I've in my house is that we are not free to share how much my wife and I earn?

It is advisable for couples to sit down and prepare budget, agree how to share  expenses. 

3. Every time you talk about money, I realise I have a problem but after a few days I revert to my bad financial habits. What can I do to change?

You need to understand the genesis of the way you relate with money. That is, your childhood experiences (what you heard, saw and went through with money) shapes your beliefs/attitudes towards money as scarce, evil and hard to come  by which in turn influences your thoughts and behaviour patterns/trends. Afterwards being aware of the causes and understanding the genesis, try to dissociate/distance from the disempowering beliefs by reconditioning/reprogramming the mindset with empowering/limitless financial beiliefs. 

3. Is it advisable to take a loan to start or improve a business?

A good loan is that that helps you to generate money. You need to be careful. Sometimes high risks yield high returns. To take a loan to  improve a business is much better than starting a new  one.

4. How can we introduce the subject of money to our children?

You should teach children by example, modelling and showing the how to budget. Don't pamper children with gifts, sit, do a budget.

5. Which books can you recommend to the reader?

Mastering Your Money by Chacha Nyaigoti Bichang'a.

How to Save Money for Investing by Ken Monyoncho.

The Richest Man in Babylon by George Clason among others.

The Automatic Millionaire by David Bach among others.

Rich Dad Poor Dad by Robert Kiyosakip

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