Think of a budget as a plan; a map that guides you to a destination. This map is based on an old sketch, and since then, new houses along your destination could have sprung up, better roads could have been constructed, and toll gate fees could have been added. The map is ever-changing and updating. Sometimes you might need to update it yourself when you encounter new features along the way.
But the spirit of the map remains. It exists to get you to your destination without getting lost. As it relates to your personal finances, the budget is your map; the roads, terrains, houses, gate fees, these are the changing costs of goods and services. Your destination is mindful spending and meeting your money goals.
Why We Budget
Imagine that your ₦300,000 salary gets paid, and you start spending it without thinking. When that credit alert lands, most people get the payday rush; you are pumped. Suddenly, the rice that you have at home is not good enough. Now, you want Mama Risi’s catfish pepper soup and beer. You buy whatever comes to mind first. For most people, that’s usually the fun stuff, like entertainment, shopping, junk food, lau lau giving, betting, fun events, etc.
Never serious stuff like medical checkups, online courses, insurance, and home repairs. You suddenly remember how you need new clothes. So, you go to the market. But, of course, you see a fine shirt or gown, and you must have it along with three others.
Meanwhile, there’s a voice nagging in your head about the foodstuff you need to buy, the NEPA bills you need to pay, and the money your compound people are contributing to repair the pumping machine. You push it aside and assure yourself that you will get to it, eventually. There’s all this other important stuff you need to buy, but you convince yourself that your pay will more than cover it. You avoid checking your bank balance because you are low-key scared of what you’ll find.
It’s not until you’ve spent a good deal of your money that reality hits you, and you realize that you haven’t bought your essentials. You slowly realize that what’s left of your money is not going to be enough to cover some of your other important bills, like utility, transport, and food. You start wondering where all your money went. But time flies when you are having fun. Now, you are considering taking a loan to cover the shortfall.
The Bias That Prevents You From Budgeting
There’s a cognitive bias called the optimism and overconfidence bias. This is when, as human beings, we overestimate the likelihood of positive outcomes and underestimate negative outcomes. We do it all the time with money. You feel rich and overestimate that your income will easily stretch to cover all your future needs. You also underestimate your expenses and assume that they cost less than they do, and that small costs add up over time.
Budgeting is your guardian angel, your roadmap, the reality check. If you sit down to budget your money before you spend a dime, it becomes clear where fantasy meets reality. Where you thought your total food costs might be ₦30,000, it could really be ₦60,000. Where you thought your 300k salary was enough, you realize it wouldn’t.
Budgeting prevents you from neglecting important but boring expenses like your security fees, irregular fees like your car paper renewal, or certification renewal. It helps you plan and be more organized. You learn how to prioritize and gain clarity on what bills are necessary or optional and what bills need to be cut to make room for more important ones.
Most importantly, it keeps you accountable and teaches you self-control by making overspending harder because once you have insight into your money, what it’s earmarked for, and what’s left, you will be less likely to think you have more than enough money for unnecessary expenses.
Tracking Before You Budget
If a budget is a map, before you can draw a map, you have to understand its terrain. That’s what tracking does for your money. It’s like a sketch of how you spent your money in the past. It shows you where your money goes, not where you think it goes.
Many people try to jump straight into budgeting without observing and being aware of their spending patterns. But that’s like sketching a map of a city you’ve never walked through. You might get the general direction (eg, rent/transport). But miss the tiny corners where your money slips away like constant data top-ups, or late-night snacking.
Tracking gives you the necessary data you will need to plan a budget: what you’ve paid for in the past, prices, quantities, how you’ve overspent in the past, and insight into whether you followed past budgets or not.
You’ll be able to better determine which items are worth buying in bulk, which ones to cut, which ones to find a cheaper vendor for, and it will also help you identify faster when inflation is rising.
Why Budgets Fail
The number one reason budgets fail is a lack of tracking data. You can’t plan a future for your money when you don’t know its past. How would you plan how much you spend on transportation if you don’t know how much on average you’ve spent on it in the past 3-6 months?
Another reason budgets fail is when they are very strict. We make budgets strict because they make us feel safe from bad spending. If you made a plan to spend on something at a very strict estimated price, and you deviate from that plan just a little bit, you might be tempted to think the budget is ruined and throw the whole thing out. The reality is that life doesn’t always go according to plan.
Another reason why budgets fail is when you forget to include large periodic expenses in your budget. They can derail your budget, especially if they are compulsory and you didn’t plan for them. Emergencies can also derail your budget, and of course, uncontrolled, unrestrained giving, like financial requests from your family and friends.
How Often Should You Budget
You could choose to budget yearly, quarterly, every six months, or monthly. It depends on how much tracking data you have and how stable the economy and prices are. Since this is Nigeria, a country where inflation is rife and the economy is volatile, the best option is monthly.
Monthly aligns with most people’s pay period. It’s long enough to plan for and short enough for prices to stay stable. For most people, Mindful Naira’s recommendation is monthly.
How To Budget
There is no one way to create a budget. But to create a successful one, here are some things you should do:
Set a Budget Number
For salary earners, this is usually straightforward. The budget number is usually their monthly or yearly pay after deductions like tax, insurance, pension, etc.
But for business owners, freelancers, contractors, or just people with irregular income, for the sake of safety, use the lowest monthly income you made from the past 6 months. Even if you’ve earned extra lately, it’s still better safe than sorry. Whatever extra you make can be considered a bonus or can be invested. If you want to be less conservative, you can use your average income from the past 6 months.
Savings and Investments
From your budget amount, specify what percentage should go into your savings and investments. This makes sure that financial stability is part of your monthly plan. It’s very easy to overlook savings in the sea of expenses that you have to pay, but it must not be overlooked or pushed off, no matter how tight things are.
In fact, for some people, they start their budgeting by setting aside a percentage for their savings and investments, then allocating the rest of the money to other things. This is called the pay yourself first budget type.
So, determine what percentage of your budget amount will go into savings and investments, and take it out before you continue.
Know Your Fixed Expenses
Fixed expenses are the recurring costs that we have to pay every month. For most people, these are utility bills, food, transport costs, monthly subscriptions, loan repayment amounts, etc. List all your fixed expenses, including the quantity and estimated price.
List Variable Expenses
These expenses are the ones that vary from month to month, like the jar of mayonnaise you have to replace every 2 months, snacks, jewelry, hair products, etc. We don’t necessarily buy them every month, but we replace them often enough that they count. This can also include one-time expenses like replacing a charger. List all your variables in a different section along with their prices.
Plan For One-Time or Irregular Expenses
This one is important because these kinds of expenses can break your budget when it’s time to pay them off, if you forget to plan for them. An example of this is annual rent and service charges. Instead of waiting for your ₦1.2 million rent to be due, set aside ₦100,000 every month. Things like car maintenance, generator oil changes, yearly checkups, domain name renewal, dental cleaning, professional license renewals, and your cousin’s upcoming wedding Aso-Ebi.
To avoid panic, don’t want to wait till the last minute to come up with the money. Make a list of all your irregular expenses for the year you can think of, the price, and when they will be due for payment. Keep updating the list as soon as you remember any new ones. If you have tracking data, all you need to do is dig in and search last year’s spending history to see if you can find any. The more tracking data you have, the better.
Once you have this list in place, you can pick the most urgent ones and break down how you are going to start setting money aside, starting from this month till the due date.
Budgeting for Fun and Relaxation
Budgets should not be joyless. They should make room for expression, fashion, beauty, leisure, dating, excitement, and even entertainment. This prevents you from burning out and, of course, denying yourself of enjoyment. If you deny yourself leisure spending for too long, it can lead to impulsive spending later because you’ll feel like you’ve suffered so much and need to blow off steam.
Do this as part of your monthly plan so that you can create a balance between discipline and fun. That being said, you should still be prepared to cut the fun money out of your budget when money is tight. Add this to your list, along with the estimated price.
Group All Expenses
Now that you have gathered all your expenses for the month: fixed, variable, fun, and irregular; group them into essentials, semi-essentials, and non-essential expenses.
Essentials are the bare minimum you need to live on every month. These items are usually at the top of the priority list. Sometimes they recur every month, and sometimes they don’t.
Semi-essentials are expenses you need that are not urgent to your survival and wellbeing, eg, home door repair, bed replacement, proper kitchen utensils, extra shoes, etc. Sometimes semi-essentials are things that are not quite due yet. Your cousin’s aso-ebi could be important, but it’s still six months away, so you could decide to skip saving for it this month. Non-essentials are the things you can live without, like snacks and entertainment.
The Margin of Safety Fund
This is your pocket money for unexpected expenses during the month. For people with average to high income, this amount is what is left after budgeting all expenses. A lot of people with low income often don’t have this margin of safety fund, because their total expenses are equal to or more than their pay.
This fund is very important because it’s there to protect your budget from unpredictable events. Think of it as a shock absorber. It’s a backup fund for unknowns, inflation, sudden rise in the cost of fuel, transportation, and foodstuffs, and for when you underestimate the price of items in your budget. It’s also useful for emergencies like car trouble, generator repair, home repair, health emergencies, and other minor inconveniences. And of course, generosity in the form of black tax, or a friend in need.
Add all of the estimated expenses you have put in your budget and subtract them from the original budget amount. The amount left can be your safety fund. But, if you deem it too low as pocket money, you might need to cut some non-essentials from your budget, and work your way up to the semi-essentials.
Make sure the fund is enough to cover small emergencies or unexpected expenses, but not so much that it prevents you from meeting your other priorities. This should not be confused with a standard emergency fund. The margin of safety fund should cover you for the month only.
The Art of Budgeting
Budgeting is an art. You alone know what your highest priorities are and what are just add-ons. You know how much you earn and your financial goals, so no one outside you can really tell you exactly what to buy and what not to spend on.
At the same time, as a human being, you are prone to blind spots, biases, and overspending impulses. This article’s role was to give you a high-level guardrail to protect you from falling off a cliff of misaligned spending as you plan your money.
We are not done yet; there’s more to unpack about budgeting. The best way to solidify this knowledge is through practice. We break down the theory in this article, and next, we apply it. We have prepared an actual, practical case study of a hypothetical working Nigerian with real figures, showing you step-by-step how to create this budget.
Click here to read: Case Study: Building a Budget with Real Nigerian Figures.
Once you’ve mastered the setup, the next challenge is sticking to the budget when life and inflation hit hard. A budget is useless if you can’t defend it. You will also learn our unique system for making difficult choices when money is tight in our most crucial guide: The Mindful Naira Lean Budget Pyramid
Have you ever attempted to create a budget before? What challenges did you encounter while creating one? Let us know in the comments.