Recently, President Buhari submitted and the congress is yet to approve the 2019 federal budget. That exercise did not just elicit interest among Nigerians, it made headline news. Various state governors have either submitted their 2019 state budget or in the process of doing so while the respective state legislature have approved or are debating on such budgets. While budgets are important to both the federal and state governments, they should be as important to individuals as well.

What is Budgeting

Budgeting is the process of creating and following an explicit plan for spending and investing the resources available to you.

Why do you need a budget

A budget helps you keep an eye on your finances? By monitoring your budget, you will be in a better position to uncover problems when they occur and even helps you to anticipate problems before they actually happen. Budgeting provides you with a means of financial self-evaluation and provides you with a guideline with which to measure your actual performance against the budget.

Guidelines for Creating a Budget

Creating a budget does not take an arm and a leg, it is not rocket science, but it can be psychologically inundating for those averse to record keeping. Though budgeting requires looking to the future, it starts with the past. The starting point for your budget is your personal financial statement, your check stubs, your pay slips, and projections of your income and expenses for the current year. It is better to have a year long budget divided into months because it affords you the opportunity to compare actuals with budgets as the year moves along, if you need to. For those who have computers and know how to use excel, budgets are easy to create and some proforma budget templates are easily downloadable and customizable from the internet.

Steps in Creating A Budget

Constructing or creating a budget is mainly a mechanical process that involves specific steps. Depending on what details or how granular you want the budget to be, here are the main steps to creating a budget:

Step 1: Estimate the family’s Annual Income

The first step in creating a budget is to identify the fixed amounts of income you expect from each income source like Salary, Bonus, House Rents, dividends, savings account interests, interest from bond or treasury bill investments etc

Step 2: Develop Estimates for Fixed and Discretionary Expenses

The second step is to identify which of your expenses are fixed and which are discretionary. Fixed expenses are those that are almost mandatory like house rent, school fees, utility bills, and expenses relating to feeding. Discretionary expenses are those that you can do without, if the need arises. They include vacation, house hold furnishings, special types of clothing, and gifts. Having identified and classified the expenses into mandatory or discretionary, it is time to estimate how much you would spend on each type monthly.

Step 3: Determine the excess or shortfall of income within the budget period

This step calls for finding the difference between the number you arrived at in step 1 and that of step 2. Depending on your financial resources and needs flow, you may have surplus income in some months and shortfalls in other months.

Step 4: Consider Available methods of increasing income or decreasing expenses

Here comes the beauty of budgeting. It tells you in advance whether you will need to look for ways to increase your income or reduce your expenditure to stay afloat. So, if your net cash flow in step 3 is negative, then either income must increase, or expenses must decrease. This is the time to look for second or third job through freelancing, blogging or so. Alternatively, it may be time to take a second look at your discretionary spending to find out those expenses that you can defer for the future or cut out entirely.

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Step 5: Monitor your budget to avoid extra budgetary spending

A budget is only useful if it does what it is supposed to do. It is useless if you do not adhere to it, then it becomes an exercise in futility. So, each month, compare your actual expenses against that months budget and see where you over or under spend. With that information, you can modify your budget making it as close to reality as possible.

Uchenna Ndimele is the President of Quantitative Financial Analytics Ltd. MutualfundsAfrica.com and mutualfundsnigeria.com (both Quantitative Financial Analytics company website) is a leader in supplying mutual fund information, analysis, and commentary on African mutual funds. We provide reliable fund data; and ratings information that will add value to fund managers, the media, individual investors and investment clubs.


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