Friday, September 22, 2023
No Result
View All Result
SUBSCRIBE
eNaira Online News
  • Home
  • eNaira
  • Capital Market
  • Business
  • Finance
  • Banking
  • PF
  • Companies
  • Crypto
  • Real Estates
  • Opinion
  • Home
  • eNaira
  • Capital Market
  • Business
  • Finance
  • Banking
  • PF
  • Companies
  • Crypto
  • Real Estates
  • Opinion
eNaira Online News
No Result
View All Result

How to prepare a cash budget 

by e-Naira Online News
February 24, 2022
in Personal Finance
Reading Time: 5 mins read
A A
0
Home Personal Finance
Share on FacebookShare on Twitter


“Kalu, I am 45, and I have never had a budget. Every book I read says I should have a budget. My question is this, is a budget essential? I earn enough money, and I can spend and still save. Do I need a budget even though I and financially comfortable? and how should I prepare a budget?” 

I have noticed that many individuals do not have the habit of keeping a budget. There are many reasons for it; the gentleman that wrote to me said he does not keep a budget because he believes a budget is for tracking expenses when your income can’t meet your needs. He makes enough, so why should he budget. Great Question.

A budget is not an alone stand document, and a budget links your income and expenditure to a goal. If you have any financial goals, you have to measure your progress in reaching that goal with regular budget reviews. A Budget also acts as a habit or behaviour change tool. If you want to change a wasteful spending habit, create a budget for that expense and slowly reduce how much you allocate to that expenditure item. This week, I will give you the step by step guide on how to create a cash budget.

Eight steps to create a budget  

1. What is your goal? Everyone needs a goal, especially a financial goal. When you have a goal, it causes resources to become focused on achieving that goal. For instance, A nation could have a goal of becoming self-sufficient in steel manufacturing; thus, it will budget and earmark resources towards that goal. On a personal level, what is your goal? Do you want to buy a home? Or start a business? Everyone has a money goal. Bill Gates’s goal may be to fund his charitable foundation without dissipation. Nigeria, like every nation, has an economic plan that addresses the vision, then the medium Term Plan, then an annual budget. China has 10-year plans. The goal is the first step. It would help if you had a measurable goal, thus instead of; “I want to be comfortable in retirement”, rather say, “I want to earn 15% of my current income in 15 years; this will enable me to have a comfortable retirement. This goal is measurable has a timeline and a purpose. Next?
2. Record all income: The next step is to record your income, down to the kobo. Income is more straightforward because most folks have a job and earn a salary paid to the bank account. However, with the income, you want to separate all revenue into;

  • Active Income: Income you earn by being physically or engaged at work; you earn a salary from physical labour.
  • Passive Income: Income you earn even when you are not at work. An example will be a dividend paid to you by a company you invested in or rent.See Diagram 1.

3. Next, you record all expenditures; this is similar to capturing all income. Expenses are more random and widespread than incomes. It would help if you captured every cent of spending you make, no “miscellaneous”. The best way to do this is to track your spending with spending apps like Mint®. You can also use an excel sheet or buy a small notepad with a pen and write down everything you spend money on in detail. I recommend you do this over 90 days, but 30 days of expenses are sufficient to start

Diagram 1. CashFlow Budgeting

4. Create Categories from your Expenses: after detailing your expenses, group your expenses into two categories, Discretionary and Non Discretionary Expenses. Then allocate each expense made to either Discretionary and Non-Discretionary. E.g. eating out in a restaurant can be Discretionary, but groceries to eat at home will be Non-Discretionary. Remember, there are no rules to this; you have to decide if that gym membership is discretionary.

  • Discretionary Expenses: these are expenses that you have the discretion to make. You can elect to make them or not make them. E.g. going for a holiday in Dubai. You can select not to go
  • Non-Discretionary Expenses: These are expenses you must make irrespective of your financial situation—e.g. food and rent. You have to eat, and you need to pay rent. These are Non-Negotiable expenses; you can delay, but they must be made.

5. Review your Income to Expenses; before you proceed to prepare a budget, calculate your total income and compare it to your total Non-Discretionary Expenses. This figure must be positive, meaning you must earn enough to meet your necessary expenses. If this figure is negative, you must stop and review your income to raise it or determine which expenses are Non-discretionary.

6. Determine the review period; you should determine when you will review compliance with your budget. This review could be weekly, monthly, quarterly or annually. This means you create a review column and track your progress towards that activity on the columns where you follow your income and expenses.

7. Record your expenses for a minimum of 30 days. Record your expenses, categorize them, and apportion them. Only after this initial apportionment do you now create a budget. E.g. you spend N15,000 on fuel for your car in 90 days, you then know how much to allocate based on your actual spending. In this case, if you’re going to reduce overall expenses, you can reduce fuel expenses or reduce other expense headers to maintain your fuel spend. This is the importance of the budget, the reviewing your actual allocation, to either increase or decrease spending to achieve a financial goal.

8. Your daily budget goal is to ensure your total income meets all recorded expenses. However, your retirement goal is to have your passive income cover your Non-discretionary costs. Once your passive income can cover your non-discretionary payment, you can retire.

To summarize, a budget works to fund a predefined financial goal. If you want to buy a home, you deploy a budget to create a cash flow that supports that goal to channel your savings and reduce expenditure. A budget introduces discipline to your spending. If you can cover all your expenses, you have a budget that allocates more to invest and generate passive income. Your goal can then be what percentage of your income is passive. See Figure 2

Figure Two: Prefered Cashflow

Other considerations

Your most essential spending item is “Paying Yourself First (PYF). Once you record your income, a percentage of your total income goes towards investing to generate passive income for you. For instance, make an additional contribution to your retirement Savings account or increase your Emergency Fund. This is a Non-Discretionary Expense. If you make every expense a necessary expense, it is difficult to cut down on costs.

In closing, a budget is how you implement and control a financial goal. It allows you to deploy resources and also reduce spending. A budget is only as good as it’s implemented. Discipline is thus a fundamental part of any budget

Related



Source link

Tags: budgetcashprepare
Previous Post

Economists See Few Monetary Policy Changes With Powell Leading Fed

Next Post

Pension: 73,600 informal sector workers register for Contributory Scheme in December 2021

Related Posts

How to budget on a N300,000 salary
Personal Finance

How to budget on a N300,000 salary

by e-Naira Online News
September 18, 2023
LASG To Close, Repair Third Mainland Bridge
Personal Finance

LASG To Close, Repair Third Mainland Bridge

by e-Naira Online News
September 16, 2023
7 Best Credit Cards for Uber Rides
Personal Finance

7 Best Credit Cards for Uber Rides

by e-Naira Online News
September 13, 2023
10 important money lessons I shared with my kids
Personal Finance

10 important money lessons I shared with my kids

by e-Naira Online News
September 9, 2023
Insecurity: FG To Build 7,000 Homes In Northern States
Personal Finance

Insecurity: FG To Build 7,000 Homes In Northern States

by e-Naira Online News
September 9, 2023
Next Post
Pension: 73,600 informal sector workers register for Contributory Scheme in December 2021

Pension: 73,600 informal sector workers register for Contributory Scheme in December 2021

This is how to calculate Personal finance Math; your score might shock you

This is how to calculate Personal finance Math; your score might shock you

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

  • Trending
  • Comments
  • Latest
FG to terminate N6 trillion abandoned road projects

FG to terminate N6 trillion abandoned road projects

September 17, 2023
Tinubu nominates Jamila Bio Ibrahim as Minister of Youth

Tinubu nominates Jamila Bio Ibrahim as Minister of Youth

September 17, 2023
Edo govt’s pact with developers promises 454 houses in Benin, Ekpoma

Edo govt’s pact with developers promises 454 houses in Benin, Ekpoma

September 11, 2023
Zamfara gov summons security chiefs over abduction of varsity students

Zamfara gov summons security chiefs over abduction of varsity students

September 22, 2023
Why are off-plan sales appealing to developers and potential property buyers in Nigeria?

Why are off-plan sales appealing to developers and potential property buyers in Nigeria?

September 22, 2023
Nigeria’s PMI drops amid surging costs and diminished demand – August report

Nigeria’s PMI drops amid surging costs and diminished demand – August report

September 22, 2023
African Development Bank And Google Collaborate On Digital Transformation In Africa

African Development Bank And Google Collaborate On Digital Transformation In Africa

September 22, 2023
NGX Stock Market Value Falls As Investors Sell OANDO, MTNN

NGX Stock Market Value Falls As Investors Sell OANDO, MTNN

September 22, 2023
Clients aren’t excited by law firm mergers – why should they be?

Clients aren’t excited by law firm mergers – why should they be?

September 22, 2023
NCAA identifies, suspends violators after Max Air contaminated fuel

NCAA identifies, suspends violators after Max Air contaminated fuel

September 22, 2023
Vertiv Further Enhances Manufacturing Capacity For Chilled Water Solutions

Vertiv Further Enhances Manufacturing Capacity For Chilled Water Solutions

September 22, 2023

Get the free newsletter

eNaira Online News

Get the latest news and follow the coverage of eNaira, Business & Financial, Stock Market, Analysis, and more from the trusted sources.

CATEGORIES

  • Banking
  • Business
  • Capital Market
  • Companies
  • Crypto
  • eNaira
  • Finance
  • Opinion
  • Personal Finance
  • Real estate
  • Uncategorized
No Result
View All Result

GET THE FREE NEWSLETTER

  • Disclaimer
  • Privacy Policy
  • DMCA
  • Cookie Privacy Policy
  • Terms and Conditions
  • Contact us

Copyright © 2022 e-Naira Online News.
e-Naira Online News is not responsible for the content of external sites.

No Result
View All Result
  • Home
  • eNaira
  • Capital Market
  • Business
  • Finance
  • Banking
  • PF
  • Companies
  • Crypto
  • Real Estates
  • Opinion

Copyright © 2022 e-Naira Online News.
e-Naira Online News is not responsible for the content of external sites.