There is nothing quite like a new year to motivate us to evaluate our life, health, and ambitions – as well as our wallets. Many individuals will begin 2023 by contemplating budgeting, planning, and savings strategies. This is always a good set of goals, but it is especially vital in Africa’s and the world’s inflation-prone and uncertain economies.
Budgeting is particularly crucial. It is the most efficient way to track income and expenses. Personal budgets might assist you in monitoring your resources as you pursue broader financial objectives. Budgeting provides more possibilities to save money, eliminate debt, and live comfortably. It can even be beneficial to your mental health.
But where do you begin? What questions must you address while developing a budget? Here are some suggestions I’ve learnt not only as an economist, but also as a research cost analyst and a budget-keeper.
1. COMPREHEND THE GENERAL ECONOMIC SITUATION
Individuals must remain informed and current with the economic landscape of their nation. Keep a watch on new developments such as free business registration, small business development funding, and the production of new money notes, even if you are not an economist. What is the current rate of exchange? What is the political climate and what international issues, such as the crude oil price, are at play? You should also be aware of the inflation rate and developments in unemployment.
This economic awareness will prepare you to create your own budget, and you’ll recognize when external conditions require a reevaluation of your objectives.
2. EVALUATE YOUR REVENUE SOURCES
The ability to earn a living is essential for sustaining lives. A stable source of income is the foundation of budgeting.
You should consider the following concerning your income and how you might budget with it:
What is my income currently?
What do I spend my money on?
Can I save based on my existing income?
What percentage of my money do I save against what percentage do I spend?
Have I the potential to make more?
How can I increase my earnings?
Your responses can aid in identifying gaps or untapped potential. For efficient budgeting, those with irregular or unpredictable income should account for the time gap in their income. The time they are not producing an income is the time gap. And everyone should account for uncertainties such as health difficulties, social engagements, inflation, unemployment, recession, and price shocks in their budgets.
3. APPRAISE YOUR EXPENSES
Expenses can be categorized roughly as “variable” and “fixed.”
Housing, food, transportation, medical fees, power, utilities, hygiene, and clothing are recurrent fixed expenses. Variable expenses are longer-term and irregular, such as investments in real estate or interest-bearing assets and the purchase of equipment.
The primary purpose of modifying our expenses is to evaluate and, if possible, improve our spending patterns. In analyzing our expenditures, we can consider the following:
What is the ratio of my income to consumption and savings? This is the ratio between how much I spend and how much I save.
What are my recurring costs?
What are my fixed, investment, and capital expenses?
What are my extra expenses that need to be modified?
Have there been any unexpected or unusual costs?
A thoughtful reaction to the aforementioned concerns presents an opportunity to reevaluate the pattern and direction of our expenditures. For instance, it is possible to identify overspending, unexpected, or exceptional expenses. This can result in an efficient and optimal reallocation of available resources.
4. STRENGTHEN YOUR FINANCES BY SAVING
Savings have been defined as a financial stabilizer due to its capacity to meet immediate needs and offer investment opportunities.
Obviously, the value of savings increases when they grow faster than the rate of inflation. Inflation diminishes the worth of savings. With a 10% inflation rate, an amount of 300,000 naira (US$676) saved to purchase an autorickshaw today may be insufficient in two months when the price of the tricycle climbs to 330,000 naira (US$744) The opposite is true when there is deflation.
Therefore, it is prudent to invest in interest-bearing assets such as equities, shares, bonds, microfinance, and production to increase the value of savings.
That is not to argue that saving is always simple. Numerous income earners do not incorporate savings into their budgets. Additionally, harsh economic realities can make saving difficult, if not impossible. However, it is possible to save tiny amounts by contributing daily, weekly, or monthly to collections, cooperative schemes, or microfinance organizations. A point-of-sale business in Nigeria, for instance, can accept a daily donation of 500 naira (US$1.13) over 25 work days, resulting in an average monthly savings of 12,500 naira (US$28.18).
When the Central Bank of Nigeria implemented the agent banking system in 2013, the Point-of-Sale business in Nigeria commenced. A POS agent performs transactions on behalf of a POS service provider. Such service providers include banks, microfinance banks, and fintech firms.
5. RUN A FLEXIBLE BUDGET
Once your budget has been established, keep in mind that it is not set in stone. It must be adaptable to any changes in your life. For instance, a sum of money set aside for the purchase of a vehicle could be invested in a lucrative business by purchasing shares through public offers or private placements in global corporations such as Nestle or Unilever.
Also, medical emergencies and career advancement programs can necessitate the use of funds.
Overall, budgeting should be adaptable enough to accommodate exigencies, particularly when accommodating the current circumstance would result in a greater good.
»Five suggestions for managing your budget: budget, plan and save in 2023«