My first experience with budgeting was when I was 13 and in boarding school. I was just starting out my secondary education and like most people in my country, I went to a boarding school
My sister was the one who dropped me off at my new school. As she was leaving, she gave me some money and promised to visit in a month’s time. I knew I had to make the money I was given last till the month-end. But knowing and doing are two different things; the money didn’t even last two weeks.
Luckily enough, she didn’t wait till the month-end to visit so I didn’t have to stay broke for more than a few days that first month. But I knew things were not always going to be like that; that there were going to be months when she won’t come as frequently. I knew I needed to discipline myself where my pocket money was concerned. I needed a budget. And that was the first time I had a budget – albeit it wasn’t written.
Then, I had one simple goal: make my pocket money last for the whole month.
Since then, I have used a budget for the most part of my life. In college, I used a budget to make sure the monthly up-keep allowance I got from the government (I was a government-sponsored student) covered my accommodation, paid for my meals, and paid for all other essentials. And because my money covered all these things every month, I thought that that meant I was good with managing my money.
Both in secondary school and in college, at the end of the month, I would b broke. Looking at it in retrospect, I realize now that I wasn’t as good at managing my money as I thought I was. At the end of each month, I would have the same money that I had at the beginning of that month, which was nothing.
Yes, I was budgeting my money, but it wasn’t effective budgeting (it was more like a buying plan). Effective budgeting should allow you to enjoy a good quality of life while simultaneously taking you a step closer towards financial freedom.
Like me, most people think they have a budget when all they have is a buying plan. I repeat, if it’s not allowing you to grow financially, it is a buying plan and not a budget.
That is why I thought of writing this post today. In this post, I want to show you how you can easily and effectively budget your money so that you can enjoy your current life while simultaneously growing financially.
The Zero-based budget method
The method I use when budgeting my money is called the Zero-based budget method. I started using this method long before I knew there was a terminology for it, it was just instinct for me. Anyway, this method is popularly associated with Dare Ramsey, one of the most prominent figures in personal finance on the globe.
This method, as the name suggests, simply says that your income should equal your expenses. Meaning that your monthly income should equal your monthly expenses. The idea is that all the money you earn in a month should be accounted for and have a purpose.
It is important to note that this method recognized things like ‘savings’, ‘investing’ as expenses. So, when am saying your expenses should equal your income, am not telling you to go shopping until you have no money in your bank account, no. Am telling you to include your short and long-term financial goals in your monthly planning.
I love this method for two reasons:
- Every kwacha (dollar or any currency you use) will have a purpose
- It will help you reach your financial goals faster by forcing you to be more intentional about how you use your money
How to budget your money using this method
You can effectively budget your income in these 4 easy steps
1. Write down you total income
The first step involves you writing down your monthly earning. This can include income sources like your salary, side hustle income, profits from a business, investment income, rental income, etc. Take the total and that will be your income.
2. List your expenses
Next you list down all your expenses.
Make sure you include everything in this list. List should include things like:
- Debt payment
- Utility bills
- Insurance payment
- Car expenses
- Eating out
- Gifts for friends and family
You get the picture, let the list be as exhaustive as possible. And make sure every month you are contributing to your financial goals (could be savings if you are building your savings or debt payment if you are working towards being debt-free). Always, always contribute your monthly income to your financial goals.
3. Subtract expenses from income
Third step: some subtraction math. Subtract your expenses from your income.
If you get a negative after doing the subtraction, it means that your expenses are higher than your income. You need to revisit your expenses and see where you can trim down. I advise against trimming down on your financial goals’ expenditures e.g savings unless it is really necessary that you do so. Instead, look at another expense line e.g. eating out, and decide if you really need to spend that much on eating out. Trim on those things that aren’t as essential until your expenses equal your income.
If you get a positive balance after subtracting your expenses from your income, congratulations. Your expenses are lower than your income. So, what do you do with the balance? Don’t ‘waste’ it. Instead, add it to your financial goals’ expenditure to help yourself reach these goals faster. Remember, each coin needs to serve a purpose.
If you get a zero when you subtract your expenses from your income, you are done. Your budget is ready to be used in that month.
The goal of this stage is to make sure that your expense and income are equal to each other.
4. Track your expenses
When you are done with your budget, what’s left is to tracking and making sure you are spending according to the budget.
At the end of the month, review the budget and see if some changes need to be made to ensure that the budget works better for you.
Using this method has allowed me to do more with my money and I hope it will do the same for you.
If you would like to learn more about this budgeting method, check out Dave Ramsey’s website.
You can also check out this post of personal finance books that are great for people who are just starting out in their personal finance journey
Until then time.