Financial literacy for all – Budgeting

The “Wikipedia, the free encyclopedia” defines a personal budget as a “finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget.”

Budgeting is a formal procedure for preparing budgets.

Expenses should be identified; sources of income also identified and allocated to expenses identified.

In the financial world, whether an organization or an individual, budgeting plays a pivotal role in decision making.

It is prudent always to have an idea of expenses and revenue that an individual or an organization will get within a particular period so the decision on what, when and why an expense or some revenue will be generated is resolved easily.

Budgeting is key planning tool used even by governments and well established organizations. Some individuals, who want to discipline their personal financial dreams and goals, also use budgeting extensively.

In the real financial world, some things would be happening and once they are known, something must be done about their happening, you do not wait till they happen before you prepare for them. It is true that when something is being budgeted for, it means the actual thing will happen later within a particular period, but once there is awareness of what is going to happen a decision must be taken on it and addressed.

Many organizations, especially well-established ones already use budgeting and budgeting control tools for making strategic decisions. My main concern is the individual, who could also use budgeting very well and benefit from its usefulness.

As an individual, employed or unemployed, you should use budgeting and plan ahead before you even get the money. Many times, the funds or money comes but because there was no budget or plan for it, it is wasted. By the time, we realize we were unwise everything will have gone.

People, who get stupendously rich, are the ones, who budget or plan ahead before they even get the cash. They would draw up a fantastic budget plan and then wait for the funds to arrive. When the cash arrives, because he had already budgeted or planned for it, he knows exactly what to use the money for and does that perfectly. He would never regret later for having not used the money for a good venture. The truth is that, we do not need to have money before we plan for its use. We need to plan what to use the money for before we get it and when we get it then we just embark on its utilization, if not we would waste it and later regret we did not invest it prudently.

When you are preparing your personal budget, remember you would need some ingredients such as:

• Objectives- this is an important planning process that your budget drawn should have an objective to achieve.
• Mission – with an organization the mission could be a description of why it exists among other things but as an individual’s financial mission for drawing up a budget would be to control expenditure and generate more income and assets as much as possible.
• Strategies – the actions taken to achieve the objectives outlined, as an individual, you need to take strategic actions to achieve your objectives as you have set them.
• Evaluation- Once the process begins; it should be evaluated to check whether it achieves its aims.
• Action- taken to keep the strategies in line or change strategies so that objectives could be achieved eventually.
• Monitor- budgeted figures should be monitored against actual figures and any differences (variances) analyzed and noted and action taken to prevent the negative ones recurring in the future.

Budgets have useful purposes among these are:

• Planning- budgeting is a planning tool and helps to plan ahead of time.
• Communication- even as an individual, you can use your budget to communicate to yourself or your spouse to remind yourselves of what has been planned for and affirm to stick to it.
• Motivation-budgeting could urge or awaken your spirit to get disciplined and motivated to achieving your short dreams and your long term goals.
• Coordination-even as an individual you use budgeting to bring all your personal financial expectations and obligations together and have a common plan for them.
• Control-actual results are compared with budgeted amounts for all expenses incurred and revenue generated; differences are attended to and addressed.
• Performance Evaluation-you can now evaluate your own performance and see if you are actually doing well by respecting your own plans.

Types of budgets

There various types of budgets such sales, material, production, labour budget, overhead budget, master budget but I would limit myself to the cash budget.

The cash budget is to make sure there is sufficient cash available to meet daily, one-ff, unexpected and future demands.

As an individual, your cash budget should not just be about all expenses and you would be incurring or loans you have to repay, it should include your income such monthly salary, dividends, bank interests received and all investments that you have in say treasury bills, mutual funds, unit trusts, reits, shares, businesses, gold and other minerals and legacies gained.

When you are budgeting, remember to include a certain percentage to cater for inflation and do not forget the various taxes that you will be paying too; they are expenses and should be included.

Forms of budgeting

There are also many different budgeting forms that organizations or individuals can use, among them are incremental budgeting, activity based budgeting, zero-based budgeting, rolling/ continuous budgeting. The commonest and easiest used among these is the incremental budgeting.

By Godwin-Xavier Ayeebo
Blog: www.g-xavierayeebo.blogspot.com
Email: gayeebo@gmail.com