Budget- What Is That? (Part 1)

“It’s not how much money you make, but how much money you keep” – Robert Kiyosaki

The notion of “budgeting” has been around for many years and has become part of the household vocabulary; yet so many of us still do not fully understand what a “budget” is, how to prepare one or even manage one. According to the Oxford dictionary definition, a “budget” is an estimate of income and expenditure for a set period of time or as the amount needed or available for a purpose. A “budget” is a tool designed to help households plan their financial commitments in order to achieve their financial goals. It is therefore important to have a “budget” if you are to be successful in achieving your financial goals.

The challenge is that that many households do not know how to use or prepare a budget and those who use a budget, do so ineffectively. Households are often dishonest about their financial commitments; understate their expenses, while other households struggle to account for their spending. The outcome of all this often leads to financial distress by households and irrational financial decisions such as using debt to bridge the gap. Wilmotte, a Certified Financial Planner (CFP) highlighted in the Financial Planner Magazine (Issue, 4 of 2017) that many potential clients have expenses that match or exceed their incomes, painting a scary reality. The question then becomes “How do we help households budget properly?”
I believe that the first step to preparing a “budget” is to understand your income or sources of income. Income is the money (wages or salary) you receive from providing a service or selling goods. The second step is to understand your expenses, which are your monthly commitments such as your savings for emergencies, amount allocated for investing, rent/mortgage bond, groceries, water and electricity, insurance, school fees, entertainment etc. Once you have full understanding of your income and expenses, the next step is to actually draw up the budget- where you compare the monthly income you receive with the monthly expenses. Generally, your income needs to be higher than your monthly expenses.

In my experience, this is usually the hardest step for many households- actually writing down the household income and expenses. We are afraid of the reality that our expenses are higher than our income, which is often the case. We are often ashamed of the expenses we incur that we actually should not be avoiding and often do not account for everything we spend our money on. But the question is how can we change or improve this? How can we become better at preparing or managing our budget to achieve the financial commitments and goals we aspire to?

Join us for part 2  where we share tips…

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