Personal budgets

This week, we will go back to the basics, budgeting and planning, because we cannot achieve the financial future we desire if we do not have the basics right. A personal budget is an essential tool for managing our incomes, controlling our expenses and ensuring that we have enough money left over for wealth creation.

To control the future, we must plan and create the future we desire. At every stage of our lives, we have important events that life brings. For the young man in his late twenties, it’s marriage, getting his own apartment and having children. For the middle aged, it’s paying for tertiary education and weddings for our children.

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Though we are people of faith who believe ‘God will provide,’ we have to be sure our case is not one of ‘God has provided’ but we used the money imprudently. If we look at the analogy of the ant – being self-motivated, they gather their food during the harvest and store up what they need – instinctively knowing that it’s what they keep during the harvest that would sustain them in the time of winter (times of less supply or greater need). We must keep something from every income we receive. It’s not the absolute amount but the percentage – so irrespective of how much we earn we need to practise keeping a percentage for ourselves; no more post office mentality. It’s what we keep that we can use to meet the financial considerations of life’s events, emergencies and investment/wealth creation.

It is not how much you earn that matters, it is how much you keep.

To know how much to keep, we need a spending budget. For us to diligently adhere to the budget, it must be realistic and not significantly diminish our quality of life. We need to make sacrifices, but they must be gradually introduced,and every family member must be on board. A realistic budget carefully considers all our spending obligations and puts realistic figures on them. Popular wisdom recommends that before budget is developed, we spend one month (one salary cycle) writing down every kobo we spend – this enables us to determine how much to allocate to each category of expenses and which expenses we can successfully reduce. Budgets should make allocations to food, housing, utilities, personal care and  clothing, transport, dependents’ requirements, entertainment, taxes, insurance, creation of emergency fund and savings.

Next, we create a financial plan that details when we want a life event/ investment to occur. The timings coincide with the time we take to raise the amount of money required to meet the needs of the event/investment. However, some life events do not ask our permission before they occur. A child going to Nigerian Law School happens whether we are prepared or not. But if we have been proactive and prepared early with sufficient savings and creative investments, we would have the school fees available – afterall, we got a four year preparation period.

Like all plans, our financial plans must contain SMART components – Specific, Measurable, Achievable Realistic, Time Bound with Threats Mitigated.

Regular savings is our gateway to financial freedom. little drops of water make a mighty ocean. So, we need to be patient with ourselves and be consistent in building up our Investible Funds. We should not be looking for get-rich-quick schemes. People who get rich quick soon become poor because they never learnt the principles of creating and retaining wealth. Before financial management training became common for lottery winners, studies showed that over 99% of them became poor within 5 years despite winning tens of millions of dollars.

We need to develop a savings habit – remember what happened to Nigeria when crude oil prices dropped below $35. We had nothing to show for the times when it was over $100. It’s easy to criticise our leaders but we mirror the same errors in our personal finances. Savings are the vehicle we use to generate funds for investment in higher yielding assets like FGN treasury bills or stock market investments. Savings themselves yield close to nothing in returns.

Financial budgeting and planning help is available in our cellphone app stores. The apps have features for budgeting, payment reminders, investment management, enforcement of spending limits and more. They use artificial intelligence to help us manage our finances and create the financial future we desire. Wasting another day puts us at the disadvantage of the time value of money. Let’s move now.