Categories
Finance and Accounting

Creating a Budget Masterplan for 2021

Budgeting is an aspect of Personal Finance that literally makes people shiver in fear😁 This is because it forces people to face the reality of their finances, and only the courageous can do that. Hence, people usually neglect it altogether. For this reason, I will not go into the “boring” intricacies and technicalities of budgeting – the part that scares people. I will keep this as simple and interesting as possible. My aim is to help you understand your need for a simple budget for your personal finance. 

WHAT IS A BUDGET? 

A budget is an itemized summary of intended expenditure coupled with expected revenue for a length of time. Simply put, it is an estimate of income and expenditure for a period. Cambridge dictionary defines it as “A plan to show how much money a person or organization will earn and how much they will need or be able to spend.”  You may define it as “A list of all planned income and expenses, a plan for saving and spending for the near future.”  From the definitions above, you can see that a budget is not something you create off-hand. It ought to be a written plan (on a piece of paper or PC). 

WHO NEEDS A BUDGET? 

There are different types of budgets for different people and situations. A budget can be created for an individual, a household, a business, an NGO, a State, a Nation, etc. Wherever a person or a group of persons make use of money on a regular basis, there is a need for a budget. 

TYPES OF BUDGET 

A simple Google search will give you many kinds of budget, making you more confused. However, I have classified budgets into 3 types, namely: 

  1. PERSONAL BUDGET – For individuals, families and households. 
  2. BUSINESS BUDGET – For NGOs, SMEs and companies.
  3. ADMINISTRATIVE BUDGET – For schools, churches, LGAs, states, nations and other administrative systems. 

Also, budgets could be classified as SURPLUS, DEFICIT or BALANCED. 

It is a SURPLUS Budget when your income exceeds your expenditure for a set period. This should be everyone’s financial goal. This implies that there is more money for savings, investment and other things you want.

It is a DEFICIT Budget when your expenditure exceeds your income. Unfortunately, this is the situation many people find themselves in. They always run out of money to fund their expenses. This calls for a red alert as radical measures must be taken to remedy this situation. You need not worry though. You will know how to solve this problem by the time you are done reading this article. 

Lastly, a Budget is BALANCED when your income equals your expenses.

WHY YOU NEED A BUDGET FOR 2021 

I could list a thousand and one reasons why you need a budget. You might even know more. You may have learnt them in your Accounting or Economics class in Secondary School and may have attempted questions on them in your final external examinations (WAEC, NECO or JAMB). But what stops you from implementing them? Lol. 

Perhaps, the most important reason you need a budget is that “Human wants are unlimited while the resources to meet them are scarce.” Sounds familiar, right? Yes, this is what you were taught in Economics. In addition, there are a lot of things, people and circumstances competing for your money. They want to take it away from you however they can – legally or illegally (Ask the victims of failed Ponzi schemes😂).

Unless you create a budget, which is basically a PLAN on how you want to spend your money, it is easy for these “human wants” to take your money away and leave you in poverty. If you experience the frustrations of not having enough for the things you need or begging for the necessities of life, you will realize you need a budget. I hope you don’t get to this point. Instead, realize that a budget is critical to financial control. 

In summary, having a budget is important because it ensures that you have enough for the things you need (and things that are important to you) however and whenever you need them.

KEY ELEMENTS OF A BUDGET 

When drafting a budget, there are certain things you must take into consideration, namely: 

  1. INCOME: This is the amount of money that comes in weekly or monthly. This includes all your sources of money – both passive and active income. 
  2. FIXED EXPENSES – These are the expenses that don’t change easily as they are paid regularly (monthly). Examples are rent, insurance premiums, taxes, debt payments, interest payment on a loan, child support, etc.
  3. PERIODIC EXPENSES – These are expenses that are less frequent. They come in periodically or unexpectedly. Examples are car repairs, home maintenance, gifts, appliance repair, loans, etc. 
  4. VARIABLE EXPENSES – These include every other thing that you need for daily living. They are called “Variable” because they vary from time to time. They include food, utilities, phone bills, TV subscription, gas, fuel for car and generator, clothing, education, medical bills, transportation, entertainment, name them. They are usually the most difficult category of expenses to track because they fluctuate a lot. When trying to fix your deficit budget, variable expenses are usually the first place to start trimming. 

HOW TO DRAFT A SIMPLE BUDGET MASTERPLAN 

In other to draft a budget successfully, you will need some basic tools, namely: 

  1. Pen
  2. Notebook or PC
  3. Calculator

STEPS TO CREATE A BUDGET THAT WORKS FOR YOU 

  1. DETERMINE YOUR PRIORITIES: To be frank, even if you were given all the money in the world, you would still wish for a million things. So, since your income is limited, you should arrange your needs and wants in order of importance.
  2. HAVE A GOAL: Once you know your priorities, set financial goals and deadlines for each goal. When you define your goals (What are you saving for?), your amounts (How much do you need to save?), your deadlines (When do you need that money?), you can create a budget – a roadmap – to achieve your goals.
  3. CREATE A LIST: Write down and categorize all your expected income and expenses in vertical order of importance. Don’t forget to divide them into Fixed, Variable and Periodic Expenses. 
  4. HAVE A PLAN: After creating the list, you need to have or create a plan, that is, determine how you intend to meet your needs and what percentage of your income you will allocate to each need. 
  5. CALCULATE: This is the stage where you have to apply basic arithmetic.  Calculate the real figures and determine how much you need to allocate for each expense. Wherever you get stuck, use a calculator. In the end, you should have a lot of figures. 
  6. EXECUTE: Finally, get into action. You aim should be to spend exactly or below what you have budgeted. 

HOW TO STICK TO YOUR BUDGET MASTERPLAN 

The thought of sticking to your 2021 budget from January to December should not give you goosebumps. Simply follow these guidelines: 

  1. Place your budget somewhere you can see every day. 
  2. When you feel like giving up, remind yourself why you created the budget in the first place. 
  3. Most importantly, have an accountability partner – someone to hold you accountable for the way you spend your money. If you’re married, your spouse can be your accountability partner. If you aren’t, your best friend, pastor, parents or anyone you can trust can be your accountability partner. Better still, you may join my SBM Program to have an experienced Financial Intelligence Coach as your accountability partner. 

In summary, taking charge of your finances in 2021 begins with having a Savings and Budget Masterplan. Now that you have learned how to create these plans, it is time to put your knowledge to work so that 2021 will be a remarkable year for you.  

N/B: This article is an excerpt from a webinar which was first published on my Facebook community – Financial Intelligence Forum (FiFo). Join the community to access my past and future publications. 

For an in-depth course on financial literacy and how to manage your personal finance, I recommend that you enroll for LEAD Resources’ Digital Economy Emerging Managers’ (DEEM) programme as more practical measures of attaining financial freedom in the digital economy have been distilled therein.

AUTHOR 

Obot Essiet Jr.
Obot Essiet Jr.

Obot Essiet Jr. is an Associate Solutions Architect at LEAD Resources, a Financial Intelligence (FINTEL) Coach and a Co-founder/COO of Naiyuan Mart, a Chinese-Nigerian procurement and manufacturing company. He runs a blog and a community on Financial Intelligence. He is passionate about helping people journey towards financial freedom through practical financial literacy solutions. Obot Essiet Jr. loves writing, gardening, watching adventurous movies, cycling and playing chess. 

Categories
Finance and Accounting

An Introduction to Financial Literacy

According to Wikipedia, financial literacy is the possession of the set of skills and knowledge that allow an individual to make informed and effective decisions with all of their financial resources.

Most of us believe that having more money or getting a bigger pay at work will reduce our financial stress and solve half of our problems. However, we fail to realize that one’s financial wellbeing is considerably more determined by how they manage and spend their money rather than how much money they make. Your beliefs about money and your spending patterns greatly influence your potential to create wealth. 

Financial literacy covers topics such as budgeting, expense tracking, investing, debt, taxes, emergency funds, retirement savings and estate planning.

WHY IS FINANCIAL LITERACY NECESSARY?

Financial literacy is necessary because it equips people with the knowledge and skills needed to manage money effectively. What do I mean? Financial literacy ensures that every financial decision you make is backed by a rationale that empowers you to be confident and secure in your choice. 

Statistics from a study in 2019 by the Financial Industry Regulatory Authority (FINRA) in America showed that lack of financial literacy cost Americans a total of $295 billion in 2018. Some of the households which participated in the study reported annual losses of up to $2500 due to poor financial decisions. Furthermore, it was stated that 63% of Americans could be categorized as “financially illiterate.” This buttresses the fact that financial literates make better money decisions than those who are not. Imagine how much you will be able to do if you can track your expenses, seal the loopholes in your purse and save more money?

Also, we must intentionally seek financial literacy because it is a subject that is rarely taught in our conventional education system even when much of what happens outside the four walls of school revolves around money management. Without financial literacy, even a well-educated and gainfully employed graduate can slide into bad debt and poverty. 

FINANCIAL INTELLIGENCE AS A PRODUCT OF FINANCIAL LITERACY

In my words, financial intelligence (FINTEL) is the basic knowledge of how money works and the application of this knowledge in making financial decisions that make life better. It is the knowledge and skills gained from understanding finance and accounting principles in the business world. This understanding, financial intelligence, can only be gained through financial literacy. 

There are three types of education: academic, professional and financial education. The primary school system places much emphasis on basic literacy skills such as reading, writing, speaking and solving arithmetic. Students are graded based on their ability to develop these skills and apply them in solving real-life problems. Very little or nothing is taught about financial education and money management in higher institutions. Hence, you must be deliberate about educating yourself on money. As you strive to build your intelligence quotient, also work on your financial intelligence. 
 
Interestingly, the skills gained in FINTEL are NOT innate; rather, they are learned and can be developed at all levels. So, you don’t have to worry about having a low grade in this. You can improve no matter the level you are. Contrary to popular beliefs, financial intelligence is NOT the state of having a lot of money. It is neither a goal nor a course that you are graded for. Rather, it is the means to the goal of financial freedom!

QUESTIONS TO HELP YOU GAUGE YOUR FINANCIAL LITERACY

It is easy to assume that you are financially literate because you “know yourself.” However, your personal finances need extra attention if you want to live well. The only way to get a better handle on your personal finances is by identifying what you don’t know and putting in the effort to get educated.  

Here are a few questions identified by Bayportsa to help you identify your financial literacy gaps: 

  1. Budget: Do you have a monthly budget that includes all of your basic expenses, debts and savings?  
  2. Expenditures: Are you tracking your expenses and do you know about how much money you spend to cover living expenses over a period of three to six months? 
  3. Debt: Are you in debt? Are you taking active steps to reduce your debts? 
  4. Emergency Funds: Do you have emergency funds that can help you to get through an event like losing your job or crashing your car without having to borrow money? 
  5. Savings: Do you pay yourself first? What percentage of your income goes into savings? How do you manage your savings? 
  6. Investing: Are you investing and growing your money? Do you understand how compound interest grows invested money? 
  7. Insurance: Do you understand the importance of insurance? Do you have insurance to protect you in the event of a major life emergency? 

If you answer “No” to two or more questions, you have some learning to do. 

HOW TO INCREASE YOUR FINANCIAL LITERACY

  1. Read self-help books on financial education. Follow authors like Robert Kiyosaki, Dave Ramsey, T. Harv Eker, Brian Tracy, etc. 
  2. Read blog posts and articles on personal finance in newspapers and magazines. Some popular blogs include investopedia.com, entrepreneur.com, forbes.com, Business Insider, Bloomberg and fintelcoach.com. For a steady supply of information, you may subscribe to their email newsletters. 
  3. Watch YouTube videos on money management.
  4. Attend financial literacy seminars online and/or offline and take notes. 
  5. Take an online course on any aspect of financial literacy that you want to master.
  6.  Listen to podcasts and radio programmes on financial management. 
  7. Get a competent financial intelligence coach or personal finance expert to give you financial advice. 
  8. Join a community of people who learn about financial intelligence. This allows you to ask questions and learn faster from other people. 
  9. Practice and share your knowledge. Put your newfound literacy into practice. Draw up and stick to a budget. Save. Invest. Don’t just learn and keep the knowledge you acquire to yourself. Teach others whenever you have the chance. This is the best way to consolidate your knowledge. 

BENEFITS OF FINANCIAL LITERACY

In an article by Georgiasown.org, it was stated that financial literacy is important because it helps people become self-sufficient and achieve financial stability. Financial literacy enables people to save money, distinguish between wants and needs, manage a budget, pay bills, buy homes, pay for college and plan for retirement. In a nutshell, it helps you create a realistic roadmap for making financial decisions all through your life.

Financial literacy empowers people. Although I am not trying to imply that you need to become a financial guru or accounting expert, however, knowing how interest rates work, the difference between stocks and bonds and the factors that impact your financial wellbeing will give you a sense of financial security and control over your life. 

Need I say that financial literacy decreases your stress level? When you lack financial education, anything that resembles credit, interest rates or investments seems intimidating and leaves you feeling at a disadvantage. When people are well versed in the state of their finances, they have the information needed to take action, modify their investment portfolio or continue with their current strategy. 

Furthermore, understanding your finances helps reduce the risk of becoming a victim of fraud. Some tactics are easy to believe especially when they come from someone who seems to be knowledgeable and well-intended. A basic level of financial education will help you recognize red flags and, at the very least, talk with a trusted advisor before making financial commitments. 

In conclusion, financial literacy is an essential life skill that every person, whether employee or entrepreneur, should deliberately learn and hone. If you stay committed to personal development and investment in financial intelligence, you are on the pathway to achieving financial freedom. 

If you would like to take an in-depth course on financial literacy and how to manage your personal finance, I recommend that you enrol for LEAD Resources’ Digital Economy Emerging Managers’ (DEEM) programme as more practical measures of attaining financial freedom in the digital economy have been distilled therein.

Obot Essiet Jr.

ABOUT THE AUTHOR

Obot Essiet Jr. is an Associate Solutions Architect at LEAD Resources, a Financial Intelligence (FINTEL) Coach and a Co-founder/COO of Naiyuan Mart, a Chinese-Nigerian procurement and manufacturing company. He runs a blog and a community on financial intelligence. He is passionate about helping people journey towards financial freedom through practical financial literacy solutions. Obot Jr. loves writing, gardening, watching adventurous movies, cycling and playing chess.