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Tuesday, 14 June 2016
Importance of budgeting in personal finance
There is tendency to spend extravagantly when there is abundance of cash in one’s possession because man’s needs are insatiable.
This practice, according to experts, can lead to a huge debt burden if disciplinary measures are not applied.
Therefore, the need for budgeting and adhering strictly to it in personal finance and in business have continuously been emphasised by financial experts.They point out that the huge debt people incur is sometimes because they spend above what they have budgeted for in a particular period of time.
Budgeting, according to experts, provides a platform for making financial decisions.
For not-for-profit and profit-oriented businesses, budgeting can help ensure that expenditure is made within the boundaries of available resources. They say it is a means of balancing expenses with income.
Economic analysts also note that effectiveness of budgeting can be hindered by the inability to predict events that will weigh down on the budget. An example is high fuel price that widens the expenditure margin of all business inputs.
To enhance personal savings and to reduce debt, experts have highlighted effective ways of budgeting.
Determine your net worth
Evaluating your net income in a month, either from a salary or another source of income, can ensure that you spend within the limits of your income without going into debt.
A financial analyst, Mr. Remi Olagunju, says, “For people earning variable income, an estimate can be made over a period of time. If debts were incurred in the past months and had to be paid, the debt should be deducted from the net income. The money remaining will determine the value of their financial resources.”
Olagunju adds that the essence of making a budget in some cases is to reduce or eliminate debt; therefore if the figure obtained is low or negative, it implies that some expenses have to be reduced.
Keep track of previous expenses
Olagunju says for individuals and families who have just started practising budgeting, they need to keep track of their previous expenses for at least the last two months.
According to him, this will enable them to understand their spending pattern and know where the bulk of their income is spent.
“In order to do this, expense receipts of every item bought should be compiled including utility bills. This can be recorded electronically using an excel spreadsheet or in a special account book,” he adds.
He explains that when the expenses are subtracted from the net income, the remaining money should be the savings.
He adds, “This can also allow you to keep track of what most of the money is spent on and determine if the expenses can be reduced.
“You can decide to reduce entertainment costs by indulging more in home cooking. Also, they can consider substituting expensive items with cheaper alternatives.”
Make realistic budgets
Financial analysts note that budgeting is capable of regulating extravagant spending and debt management.
Olagunju posits that families that maintain a budget and adhere strictly to it over a long period are able to save more and acquire wealth.
He adds, “When preparing a family budget to manage your personal finances, try not to underestimate the budget to save money, but ensure that it includes all important family needs that will make life worth living. Have the discipline to make it work and let your spouse agree with the budget.”
Have monthly savings
In situations when plans have to be made for investment and future expenses such as vacation, a new vehicle, a property or home renovations, an emergency savings account or retirement, Olagunju says that budgeting will make it possible to forecast how much money is expected to be saved towards it on a monthly basis.