Two years after my national service, I became very good friends with an external auditor who was part of the audit firm that audited our company back then. They came around at least once a year and would stay with us for a couple of weeks auditing our processes to ensure there were no breaches and nothing untoward had been done. We had lots in common and because I worked in the accounts department, I engaged the audit team frequently by getting them payment vouchers, journal vouchers and practically any source document they needed to do their work. We used to talk about a lot of things, from football, to movies, to music and what not. He was also a few years older than me, so it was easy for us to become friends and used to hang out after office hours a few times.
Something that happened during one of their visits turned out to be a real eye opener for me. I picked up my phone to call my friend one Friday evening and asked that we hang out. I mean, the usual stuff; watch the game at a pub, listen to some good music, buy kebab, talk about our dreams and aspirations and any other thing boys do on Friday nights. I liked talking to him because he was a very ambitious guy and always inspired me in many ways. I just did not think that would be his answer that very evening. ‘Victor, I have exceeded my budget for entertainment this month and so we can hang out, but the bill would have to be on you. Cool?’, he replied. What? Budget? I looked at my phone to see if I had not mistakenly called the finance minister then or some CFO of a multinational. What does budget have to do with two young guys wanting to catch some fun on a Friday evening? I found it a bit amusing, but I was not amused at all. More especially when I knew when he earned practically three times my salary! Budget! Chairman, really?
He explained when I drove up to his hotel later that evening. One of the things I liked about him was he was always upfront and firm in communicating something. And this was him being himself; telling me ahead of time before we went just so I do not feel he had caught me by surprise or anything. He told me he had always had a personal budget and had always tried to stick to it ever since he started doing his national service. He said it was something he had picked up from his supervisor during one his vacation trips to the UK while in the University (oh, good old ‘bogga’ days). It had to be the UK, those guys are chisel, or so I thought erroneously in those days. An eye-opening night! Budgeting was not only for a finance minister after all because for me, it was all about earning, spending and Insha’Allah.
What is a Personal Budget?
I define a personal budget as a way of scientifically measuring your income and spending levels to tell whether you are breaking even as a little self-company, making gains, or you are simply a Houdini (a magician; in reference to the famous magician, Harry Houdini). A budget as defined by Investopedia is an estimation of revenue (income) and expenses over a specified future period of time and is utilized by governments, businesses and INDIVIDUALS. Personal budgets are extremely useful in managing an individual’s or family’s finances over both long- and short-term horizons. Usually, the utilization of budgets by governments and businesses is not so much of a problem; at least they exist largely in those instances and there is data to tell whether there is a budget deficit or surplus.
However, this picture of having a deficit or surplus when it comes to our personal lives are largely non-existent. I know this because I have had lots of discussions with clients, have spoken at both large and small events, and the results are not encouraging. Most individuals do not have it and the few who do, mostly do not stick to it at all. And because it is not such a common thing amongst us, there is a lot of push back when you try to suggest the need, even remotely, for one to have a personal budget. Some of the misconceptions I get from individuals who do not see the need for a personal budget include;
- I earn a decent amount of money to be concerned about a personal budget. There is this great misconception that a personal budget is only needed when money is tight, and one needs to keep eyes on the ball. I do not see how this is a reason to not want to keep a personal budget because multi-billion-dollar companies like Coca-Cola keep a budget. Budgeting is not for broke people or people who are struggling to make ends meet. Far from that. People who earn a lot of money stand to gain much more from keeping a personal budget in the sense that it can help greatly to maximize savings and investments. It guides in ensuring that your hard-earned money is not being wasted but being used to achieve the best of purposes. One thing I find ironic is when some of my clients who are wealthy businesspeople keep strict budgets for their businesses but have rather loose spending habits in their personal lives. It almost feels like they are chasing the wind because they make so much and misuse so much to the extent that their businesses tend to suffer with time.
- I am too broke to think of keeping a budget. This is in direct contrast to the point above. I have also spoken to people who feel they do not earn enough to even think of having any sort of budget. That for me is scary and suicidal. For such people, they live by the mantra that is common in many Ghanaian households; ‘hand to mouth’. Survival is based more on hope than any deliberate attempt to understand their finances and plan a way out of the hole. I have lived like that before and for me, my financial growth was more of ‘Insha’Allah’ than anything else, to hell with a personal budget. I had a client tell me that it would be more depressing for him to know clearly how much he earned compared to how much he spent so he would rather not know. Well, I strongly believe it is more depressing and even more dangerous to not know where you are financially because how do you take steps to address something if you do not know in the first place.
- Oh, the cheques will keep coming! Does anyone still believe in this statement after what this pandemic has taught us? The uncertainty in today’s world is at an all time high and no one can confidently believe that they would keep raking in the cheques; be it a pay cheque or cheques from a business. Imagine owning a big cinema in Accra and having this belief. Or working at Tullow Oil and believing that the bonuses and pay cheques will never dry up. News flash, cinemas well closed for close to 2 years and oil firms have embarked on some serious downsizing.
- Personal budgeting is for people who are miserly. There is this general feeling that the moment you talk of having a budget in place, it means you are going to live a very frugal life and deny yourself of the good things in life! The reason why this feeling exists is very difficult to fathom. But believe it or not, it does exist! Having a personal budget should in no way equate to living a miserable life. The aim of budgeting is to ensure that you are not behind in your finances, save a little each month (preferably 10% to 20% of your income) and ensure that you are making progress financially. It is to help you understand where you are with your finances and to aid in at least ensuring that you are not spending more that you earn. That should in no way mean that you cannot eat at a restaurant or go on a vacation if your there is room in your budget for it. Personal budgeting is not for miserly people, it is for people who want to have a realistic chance at building lasting wealth.
- Mathematics? Please pass me by! This may sound funny, but it is a worry for some. To sit down, do addition and subtraction, engage in all the complexities of budgeting is too much work for lots of people, especially for those who lost their Math teachers in the early 80s. Worry not and do not think of consulting of contacting a prophet to resurrect your Math teacher for any reason. There are lots and lots of good mobile apps to help you keep track of all your expenses, incomes, debts (if you have any), savings and investments. All you must do is key in the information and all the work will be done for you. Get apps like ‘You Need a Budget (YNAB), ‘Mint’, ‘PocketGuard’, ‘Zeta’ and a whole lot on PlayStore or AppStore and start exploring. You may also reach out to a professional to assist you in this regard.
Building a Budget
- Know your income levels. Be thorough in knowing how much money you make after all statutory deductions, for both formal and informal sector workers. Usually, it is ideal to use averages if your income varies from month to month. Again, be thorough about your sources of income because the more accurate it is, the better. If you have interest income from an investment, add it. Add everything.
- Determine your expenses. Break them down into fixed and variable expenses. Fixed expenses may include things like rent or mortgage, car payments if you have any, and utilities. Even though rent in Ghana is paid in advance, it is important to break down the bulk payment into your monthly budget. Then there are the variable expenses which largely vary from month to month, like groceries, fuel, entertainment and so on. Try and record your expenses daily by using a mobile app or the old school pen and paper if that works for you.
- Reality Check. Now that you have painstakingly gone through the exercise of determining your income and expenditure, what is the difference? There are mainly 3 possible outcomes; you are making more than you spend, you are breaking even, or you are heading for HIPI (Highly indebted poor individual, except that there is hardly an IMF bailout for this). If your expenses are higher than how much you earn, you can either spend less or make more money. The easier option is to spend less because that is most likely to be within your control. Look back at your expenses and see what you can cut down. This is where I get all philosophical and say that learn to say, ‘my spending’ instead of ‘expenditure’ and realize that it is all within your control. Personally, I have had a phobia for words that begin with ‘ex’ since I had my heart broken in 2009 (Ei Mary O, hmmmm). One other beautiful thing about this exercise also is that it can get you thinking of ways to make more money because sometimes, you can only cut down so much if your income levels are not so great.
- Determine what to do with your surplus! If you have savings after you do the subtraction, that is amazing news! Importantly, it should not end there. You must determine what to do with the savings you are making. Do you have any high interest loans? How about we plan to pay off any such debt quickly to free up more space on the budget. Proceed to also build up an emergency fund that will be equal to at least 3 months of your monthly income for any unforeseen contingencies. We can also decide to have a percentage of mix of the surplus go into different savings and investment goals, i.e., 10% into your retirement fund, 20% into the kid’s education fund and so on. Whatever you decide, have a solid plan for the savings you are making on your budget so that all your work does not become a fruitless exercise.
- Keep your eyes on the ball. You cannot afford to have a relapse of any sort once you have your budget in place. Make it a habit of sticking to the allocations you have made on your budget. Old habits die hard and so there is always the temptation of going back to your old life of working, spending, and hoping that you will come into some big money that will change your financial life. Review your budget regularly to ensure that you are sticking to it. Also, do not be afraid to adjust if need be!
Personal budgeting is a wonderful way of managing your finances. If done well, it gives you a broad overview of where you are financially, making it possible for you to take steps to consolidate your wealth and leave a lasting financial legacy. You may be doing well without one, but I bet you will do even better with one in place. Also, you may be struggling without one but with one in place, you will better understand your predicament and begin to take concrete steps in correcting your financial situation. Either way, you can only win with a personal budget in place, Insha’Allah!
About the Author
The writer is a licensed investment advisor and works with EDC Investments Limited