At the center of financial literacy is the ability to prepare and successfully execute a budget.
More often than not we tend to make unrealistic budgets and thus making it difficult to manage and follow through. The following steps below discusses on how to develop an effective and realistic budget.
Step 1: Define your financial goals
The idea of having a goal to achieve with your budget makes it easier to follow. Budget goals could include, building a good money culture; budgeting to meet a target project (school fee, furniture, buying a car, etc.); building emergency funds or; building personal savings. Whatever the case, having a goal and developing your budget with the goal in mind is an effective way of building realistic and achievable budgets.
Step 2: Budget in line with your income frequency
It is important your overall budget is broken to reflect your income frequency i.e. if you earn on a monthly basis, your budget should be monthly, if weekly your budget should be weekly and if daily the budget should be structured daily. Where the frequency of income is not structured, having a monthly budget is highly recommended.
Step 3: Track your daily expenses
The next step for a good budgeting practice is to track daily expenses for at least 30 days using a daily expense tracker. This will help you develop a sense of your aggregate daily/monthly expenses and also provide insights to leakages that can be optimized.
Step 4: Develop an income distribution formula
One healthy way of creating a realistic budget is to develop an income distribution formula. The formula should be developed using information from your daily expense tracker and budget objectives. A widely adopted budgeting formula is the 50-30-20 i.e. 50% of your income for needs (housing, feeding, clothing and health) 30% for wants (lifestyle and entertainment) and 20% for savings (savings and investment). While this formula promotes a balanced financial life, we strongly recommend that you align your income ratio with your budget objectives.
Step 5: Stick to the budget.
An important and perhaps the most important step in budgeting it the willingness and determination to stick to the budget. You can find effective and proven ways of sticking to budget in our article on “How to Stick to the Budget”.
Step 6: The final step in budgeting is to continue to track and monitor your daily expenses to mark progress and compliance with the budget.
© 1kobo
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