Budgeting for the New Year

BY: Edwin Safo-Kwakye Jr

The New Year has come and with it a renewed spirit of optimism. Families and individuals all over the country are excited for what the year brings. As always, resolutions are set and just like the winds they ride on, they evaporate into thin air never to be seen or heard of again.

They are mere wishes not backed by action. Many families will resolve to do well financially this year, however, the next step required to move this from a wish to a goal is the drafting of a budget.

The word budget takes its roots from the Latin word “bulga” which means a leather bag or a knapsack. The development of the modern meaning of the word traces its roots to early medieval France to the street poets and performers who assigned a member of their team to carry a leather bag (bougette) with the task of handling and keeping all monies received for their performances.

For this article, we will focus on personal budgets or budgeting for your family. I will urge all readers to take a notepad and draft a budget by applying what they learn from this article.

The benefits of having a budget are numerous but I will mention a few that I believe should compel you to draft one.
• It allows you to have your finger on where the money is going. There are many times I have heard people utter the words “where did the money go?”. Having a budget allows you to track your finances in a way that works for you and keeps you informed on where and how your money is being spent.
• It allows you to cut out unnecessary “wants” and focus on important “needs”. In preparing a budget, you will have to think through your year clearly i.e., the projects you want to achieve be it a new business, a new home, a new car, new phone, vacation , the investments you wish to make, the responsibilities you are burdened with, the potentially unforeseen events that can catch you by surprise.
• It allows you the opportunity to prioritise your life by prioritising your spending and focusing your resources on things that are very important to you and your family.
• Finally, it ensures you prepare for retirement as a portion of your income will be allocated towards investments for your future.

Here is guide on how to draw your personal budget
Determine your net income
At the heart of every budget is your net income. This is all the monies you and your household will receive after taxes and statutory payments. If you are a freelancer or self-employed, make sure to track your income and deduct all statutory payments and taxes to arrive at your net income position. This is important because if you fail to do this correctly, you will have a bloated income which can lead to overspending.

Track your expenses
Once you determine how much money you have coming in, the next step is to figure out where the monies are going. You can achieve this by categorising all your expenses. Begin with your fixed expenses; these are regular monthly bills such as your rent, electricity and water, school fees and any outstanding loan payments.

Next, list out your variable expenses such as groceries, eating out, mobile phone data and call plan, transport, entertainment, personal grooming etc. Remember, a budget is personalised so based on your current lifestyle, categorise all your expenses to enable you track!

Lastly, for those who have travel or a big ticket item as an expense for the year, you can determine the cost of the item or travel and divide by the number of months to the event or purchase e.g. if you plan to travel in June with a budget of say GHc 15,000, you can divide GHc 15,000 by six which gives you a monthly expense of GHS 2,500 towards travel. By the time of the trip, you would have saved up for it. This will free up GHS 2,500 from your expenditure after the travel or purchase which means it can now be applied towards an investment or another future expense if you so wish. This is the beauty of a budget if done properly.

Compare your net income to expenses
The purpose is to determine what is left behind when you subtract all your tracked monthly expenses from your monthly income. The goal is that your net position is positive which simply means there is money left behind after the subtraction.

If not, then you go back to step two and try and correct the excesses by making cuts to your tracked expenditure. This is where you have to “cut your coat according to your cloth”. This is where the family makes compromises on its goals for the year. This is where you get innovative with expenditure reduction. Find ways to stretch your budget whiles ensuring there are rewards in-between to keep you and the family committed.

On the other side of the equation will be to find ways to boost your income. Some ideas may be to convert your hobbies into side hustles, take on freelance roles, take on another job if feasible or find creative ways to exchange your labour or intellect for additional income.

In the scenario where you have money left behind after the subtraction, I will advise that you invest that income for your future. Ensure that you also have investments in near cash instruments i.e., investments where you can easily liquidate to cater for “emergency” situations that may fall due.

Set realistic goals
The goal is to ensure your monthly income exceeds your monthly expenses. It is that simple. However, the quantum of what is left behind is guided by your personal short- and long-term goals. If you plan to invest about 15 to 20 per cent of your monthly income, then this is the mindset that guides your budget creation.

The remaining amount will be what is left to cater for your other expenditure.
Remember, identifying your goals and writing them down in a place you can easily access and read over again will motivate you to stick to your budget.

Adjust spending and review your budget regularly
Continually adjust spending to ensure your net position is positive i.e., you have money left behind every month after subtracting your monthly expenditure from your monthly income. Remember, small savings can add up to a lot of money at the end of the year.

Whenever you seem to be going above your budget, look towards your “wants” and adjust accordingly for that month. If that is not enough, then you will need to adjust your fixed expenses, but these always come with trade-off so do the necessary research before adjusting.

Review your budget regularly to ensure you are on top of issues so they don’t creep up on you. In periods of high inflation, price adjust so you know where to cut to ensure you are able to stick to your budget successfully.

If you get any windfalls or raises throughout the year, don’t forget to also adjust the income side. Based on your goals, a portion or all of the amount of your windfall should go straight to investments.
I wish you and your household happy budgeting and prosperous New Year.

The writer is a credit manager and personal finance enthusiast with a decade worth of experience providing debt structuring solutions on the continent