Although budgeting may seem like a drag, being in debt is even more of a downer. By getting a grip on your spending, you can build your savings and improve your credit score. So, what really is a budget? A budget is a plan for your future income and expenditures over a set period of time. Typically, a budget is used to guide your spending, savings, and investments.
Since it will be difficult to invest if we spend all our income, it is important to classify what we buy into things that are necessary (we call these our ‘needs’) and those that are not so necessary (we call these our ‘wants’).
Firstly, needs are critical to human existence. They include food, shelter, clothing, health care and transportation. Our wants, on the other hand, are the things we can do without such as jewellery, fashionable gadgets, perfume, entertainment, etc.
To prepare a budget, you first need to sum up all incomes you expect to earn within the budget period. Your budget period may be for a year, monthly or even weekly, depending on your need.
Having summed up all expected income for the period, you then separately add up all the expenses you expect to incur. This will give you the sum total of your expected income, and your expected expenditure.
Finally, subtract your expected expenditure from your estimated income.
At this point, three possible scenarios could play out:
- If you have a positive balance, then you have a budget surplus. That surplus should be saved for future investments.
- If you have a negative balance, it means you have a budget deficit. You are living above your means and need to urgently cut down your spending.
- If you do not have a balance, positive or negative, it means you spend all your earnings and cannot save. Just like a budget deficit, this is financially unhealthy. You may need to find additional means of earning income or cut down your spending or both.
This article comes courtesy Unity Bank as part of The Bankers Committee Financial Literacy Public Enlightenment Programme, brought to you by The Bankers Committee, comprising all the commercial Banks in Nigeria and the Central Bank of Nigeria (CBN).
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