How to budget

A budget is simply an estimate of your income and expenditure for a given time period. I personally have a monthly budget, an annual budget and a three year budget. If you really desire to take control of your finances budgeting is an absolute essential.

My personal budget has five distinct components:

1. Income. Under this section I list all my revenue sources. This will typically include: salary, bonuses, business income, interest, other income, etc.
2. Loan repayments. When I was still in debt I used to have a separate section for all my loan repayments.
3. Living expenses. This part includes my day to expenses. Typical expense categories include: electricity, water, gas, Pay TV, fuel, school fees, food, home shopping, personal expenses, giving, medicare, car maintenance, etc.
4. Short term investments. This part includes all my short term investments. This category has things like: SACCO savings, Unit trusts, fixed deposits, treasury bills, shares, insurance products, savings accounts, etc.
5. Long term investments. Under this category I include investments in land, property, business, forest management, businesses, etc.

The overall objective is to balance the budget. Expenses MUST not exceed income. If this happens you end up going into debt. Depending on your station in life your living expenses should be a small proportion of your budget. Over 50% of my income now goes into short term and long term investments. Also watch your loan repayments to make sure that your loan repayments don’t exceed 40% of your income.

Your short term investments should be able to cover you for at least six months in case you lose your primary income source. Ideally you want your total investments to be at least 30% of your income. This is the way you build wealth gradually. If you are not saving or investing it means you are living hand to mouth.

I also track my expense to see if I am following the budget. I use a simple app on my phone. This basic budgeting discipline allows me to stay in charge of my money.

Sometimes the issue is not expenses but income. The income/salary may simply be too little. If you have been following this blog I have written on various ways to increase income. The basic principle is that money is a reward for service rendered. You have to figure out how to be more valuable to as many people as possible. Cater to people’s needs and money will gladly be a constant companion.

Budgeting is a discipline and habit. Like any discipline it takes a while to master. Remember that nothing worthwhile is gained without effort and perseverance. Baby steps taken in the right direction can produce incredible results.

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