Budgeting 101
You should have a good idea of what your money is being spent on.
I’m using ‘budgeting’ here very loosely to show you how to create a blueprint of what you want your money lifestyle to look like and eventually become if you follow my advice diligently.
So, you have defined your money goals, and for the month of July you (should) have tracked your expenses. You (should) now have a good idea of what your money is being spent on. Now we are going to take the information from there and build this into a new money lifestyle.
Before we begin, I need to do some positive PR for the word ‘budget’. Some people hear the word budget, as a noun and recoil in disgust (most likely because they have associated it with limited resources - instead of the ALLOCATION of resources). Some hear it as a verb and suddenly, a series of instant gratification spending sprees ensue. I am here today to start the image laundering for Budgets both as a noun and a verb.
The first thing you need to know about a budget as a noun – is that it is sort of like a map or a globe, and tracking your expenses is like a compass to see how far you are veering off on your financial freedom journey. ‘Budgeting’ as a verb is simply you adjusting your sails when the winds are favorable or unfavorable; making sure your life vests are in order, checking for leaks on your boat. You are basically doing what you can to ensure there are no avoidable mishaps. That’s what ‘budgeting’ as a verb really involves. Although the process of budgeting is personal, I’m going to lay out a framework with examples of how to do it, so that eventually you may even start to enjoy budgeting, both as a noun and verb.
Set long term and short term money goals
First, we set our REALISTIC** money goals, which I hope we have all done.
Now, go a step further and split these goals into long term and short term goals. While these are different, they are both equally important and they complement each other - your short term spending impacts how much you have to put away, and therefore influences how much you’d have later in life. Short term goals should really be interlaced with targets that involve working towards fulfilling your long term goals.
A very simple example to illustrate this:
Your long term goal is to own a house that costs N50 million and you want to close this out in 5 years, and lets say, your short term goal is to settle all your monthly obligations as at when due i.e your service charge, monthly toll gate, personal shopper subscription, etc.
In the absence of an additional stream of income, incorporating your long term goal of paying for your house in five years will mean that you’d substitute your personal shopping service subscription, and use those funds towards your N50 million payment.
If you previously every month spent 500k a month on your personal shopper, you’d re-route those funds towards either making monthly payments to the developer of the 50m house or invest it in a fund that’ll yield interest and then at the end of the year, close out the fund and transfer the money to the developer.
Now it’s really important that when we set our long term goals, we set goals that are personal to us as individuals. Doing this gives us the emotional buy-in to let us follow through with our short term goals that support the long term goals.
Building on the house example above, if you want to buy a house because Mrs Jones, just bought a house, even though you have never wanted to be a homeowner, then making and following through with your newly defined short term goals, would be akin to entering the express without being careful.
Word to Egungun.
What I mean to say is, I have found and I continue to find that it just won’t work. Following through will be painful, you’ll be irritated and honestly, you’ll start having beef with ‘Budgeting’ as a noun and verb.
Work towards creating provisions in your budget.
Note: I do not mean provisions as per foodstuff a la boarding house (to all of you tempted to misbehave). I am talking Provisions like making allowances in your budget for predictable expenses that are yet to crystalize, but you know will come as surely as day follows the night. For instance, if you have a car, you know you have to service it. Maybe not monthly but definitely at least once a quarter. What provisioning does, is that feeding in from your tracked expenses, so that you can anticipate and then provide for these costs monthly, and when they crystalize, you just make the payment without losing sleep over what to substitute.
Now you might say, “ah, but I didn’t anticipate this expense”, to you I say, I promise you if you have tracked your expenses long enough, at the end of this year 2020 you won’t have any more unanticipated surprises.
Remember that budget isn’t set in stone, it’s flexible and thankfully excel is easily customizable so you can add or delete new line items for provisions as necessary.
Another Illustration:
Let’s assume you service your car once in 3 months or every 5000 kms and it costs you 15k. But the last five times your mechanic has come to service your car he has needed to change one thing or another and you end up spending 20k. When creating your budget, for your monthly expenditure, you include 6,700 in a budget line item that says car servicing, and at month end you move this amount to another one of your many bank accounts that isn’t your major spending account. When your car starts making a strange sound and it’s time to service it, there is minimal panic in your mind because the money for the mechanic has been set aside and is waiting for him to come and fix your car.
Your expenses become like water off a duck's back. Easy and borderline enjoyable.
Now that you have an idea of what your monthly expenses are, because you are diligent tracking your expenses, you also have a clear idea of what you want to do in the long-term. Mine includes seeing all the seven new wonders of the world and I have a travel fund that I fund frequently enough that I’ve seen two of the seven already. You know what your personal non-monthly expenses are and you have created provision line items for them in your budget (these can range from Annual rent; to quarterly car servicing cost, or can even be a beauty treatment you want to treat yourself to at Christmas).
When you put all of these together in your excel sheet***I present to you, your budget.
The best part of creating a budget this way is that you can compare your tracked expenses to the budgeted amounts AND can adjust variations such that you are two steps ahead of financial surprises. This works both ways as well, when you begin to track and compare your actual with your budgeted, you begin to see the pattern in your spending and understand the why behind why you act a certain way surrounding your money spending.
After tracking my expenses and comparing to my budget, in the 3rd month I figured out that when I got my period, I had the tendency to morph into a debit card ninja, swiping through all the Instagram retailers and buying things I had no interest in. Once I discovered this, I decided to pick one item and I now subscribe to a beauty box service. What this does for me is that it further strengthens my delayed gratification muscle and I receive a range of beauty items at the peak of my cycle when my PMS is driving me crazy. Prior to this I had spent a huge amount of money on things I honestly had no need for and I struggled to understand why I kept splurging.
Honestly, a well created budget is your best friend.
There isn’t a better map to financial freedom. When wielded properly, it helps you create a richer and less stressful future for yourself. I implore you at your money confidential meeting this week to really sit with the numbers and create a budget that gives you the freedom to give yourself the financial life you deserve.
Till next week, I leave you with the immortal words of ABBA,
All the things I could do, if I had a little money, it's a rich man's world.
ABBA
**Realistic caps lock to really emphasize that while you can afford anything, you can’t afford EVERYTHING, and your budget should really only reflect the things you want that are important TO YOU, as an individual.
*** Please send an email to contact@peermentorcircles.com for a copy of the excel sheet I use to set my monthly budget that feeds into my annual budget and allows me to track my expenses so that I can make real time comparisons. Also if you reached out last week, you should have more clarity on the extra sheets and how they work after this post.