How to budget for the year and the importance of budgeting
Correspondent | Thursday February 16, 2017 16:10
When it comes to budgeting, one could typically argue that a person falls into either of two groups: those who actively use budgets and those who do not. The latter can be further broken down into two other groups, those who do not know about budgeting or do not care, and those that mentally plan their budgets. Many of us fall into this very last group - those that know about budgeting, have been meaning to do it for a while, but never actually make the time to sit down and plan one. We are the people that begin to mentally do our budgets as we walk into Spar and pat ourselves on the back for being ‘so organised’ for doing it then; for being on top of our budgeting game and never letting the ball drop. The challenge, though, is that it never turns out as we imagined it would when we first walked into the shop, does it? Mentally preparing a budget may be, in fact, nearly as bad as not preparing one at all.
It is important to sit down, and properly plan how you are going to spend your money. “Most people tend to have a ‘rough idea’ of what their finances look like. They underestimate the importance of sitting down and writing out your budget. Firstly, it gives you an objective view of your finances. Secondly, it allows you to track your spending. If done diligently, it allows you to see your spending habits and nip out your spending problems,” said Wabo Moswate, Stanbic Bank Botswana Head of Products.
Planning your income and expenses is an essential part of budgeting. It is also often the easiest stage in developing a budgeting habit, once you make the decision to get started. For most people, the challenging aspect is putting it into action. Typically, the beginning of the year when most people are excited about implementing their New Year’s resolution, is the perfect time for finding motivation to plan one. Once the planning is done, the real work begins.
Start small. Break the year into manageable time - frames, a month ideally. If you are using Excel, list your income streams on one column and your expenses and debt payments on the other. Be as detailed as you can. If necessary, consult with your spouse or partner to make sure that you have covered all your expenses. Then do the math.
When it comes to enacting the budget, always pay the big expenses first - the mortgage or rent, car loan, electricity and food. These are the legs upon which your life stands. They are typically your biggest pain points when you do not have sufficient financial resources. If you have a child of school age, school fees should be among the second most important expenses to pay. Savings and emergency funds should be among the third most important when implementing your budget. For savings, it would be best to enrol in an automated savings plan that reroutes the savings amount to a savings account as soon as you get a check.
Automated savings plans ensure that you do not ‘accidentally’ exhaust your money on frivolous purchases and cut into your future income. They help you to save consistently over a long period which is good for your overall financial health and ensuring a comfortable future as far as you can control. When you choose a savings account, make sure it will not be easy to access your money. Choose a plan where you must jump a lot of hoops to access your money to overcome the temptation of dipping into your savings. In case your savings account doubles as your emergency fund account, try to see if there is another way you can solve your problem without touching your rainy-day account. In the long-run, it is important to have an emergency fund separate from your savings account to prevent you from depleting your savings account.
As you get used to maintaining your budget, take it a step further by collecting your receipts and studying how your spending habits change over time. Most importantly, set financial goals, develop strategies of how to reach them and track how you are progressing towards achieving them.
Budgeting is an important life skill to have and one that you can get better at over time. If you make it a practice, it will not only be good for your mental health and financial wellbeing, but also for that of your loved ones. Good financial health lets you focus on important areas of your life and plan for your future and that of your family.
So, how will you get started on budgeting for the rest of the year?
*This is a consumer education piece from Stanbic Bank Botswana