CENTS AND SENSE
By George Chege
Article Number 5
BUDGETS ARE BORING AND SPENDING IS SWEET
Although almost everyone understands what a budget entails, most people do not use a comprehensive budget on a regular basis. The reasons are simple. Some people have no idea where to start while others think budgets are time consuming and boring. Some think it is just a matter of spending less than what you earn or that a budget is a list of things you wish to buy. Today I will show you a simple personal budget that will take only 5 minutes of your time, a month. Yet it will cover the basic priorities of personal finance and put you on track to financial independence.
What makes spending so sweet? It is mainly because of the following 3 reasons:
- Marketing. Companies spend millions of dollars in consumer research and they know many ways to entice us to buy things we do not need and feel good about it.
- Easy credit. Since it is so easy to get credit, we confuse credit cards with money. Numerous fees and high interest charges are deliberately levied to commit our future income to credit card companies - leaving us with nothing to save. This is how the average American family ends up with negative savings.
- Here-and-now attitude. We do not have the discipline to save until we can afford to spend. We are anxious to satisfy a buying-urge instantly.
Why is it important to have a personal budget? 3 main reasons are:
- A budget simplifies your financial plan by presenting it in numbers that are easy to understand. For example, I want to contribute $150/= to my retirement account every week.
- A budget identifies your priorities and helps you determine how to spend money.
- A budget helps you to evaluate actual performance and to determine corrective action.
Simple monthly budget – The 5-fold Budget Solution
A budget has 2 broad categories, income and expenditure. We will concentrate more on expenditure because it is the way you spend that has a bigger impact on your financial destiny than simply what you earn. For example, if Mary earns $2,000/= a month and invests $200 a month she is financially better of than Joe who earns $4,000/= a month and saves nothing.
Your expenditure can also be classified into 2 broad categories. Fixed and flexible. Examples of fixed expenditure are rent, loan payment, insurance etc. All the other expenses are flexible in that you can determine to spend less or more e.g. entertainment, donation, food, clothing and transport.
According to the 5-fold budget solution, no matter how you wish to spend your money, just make sure you spend some of your flexible expenditure on the following 5 items.
- Retirement account
- Emergency fund
- Savings account for large purchases
- Entertainment and donations
- Personal Development
So in essence your budget comprises of only 5 items. You can list them down on a card, put a number next to each item and your budget is complete. For example, below is Tom’s 5-fold budget solution.
- Retirement account $150 per week
- Emergency fund $100 per month
- Savings account for large purchases $150 per month
- Entertainment and donations $500 per month
- Personal Development $350 per month
At the end of every month, Tom looks at his budget and confirms his expenditure for each listed item. It doesn’t take Tom more than 5 minutes to evaluate his budget.
The beauty of the 5-fold budget solution is that it covers the most critical items and gives you freedom to spend the rest of your money as you wish.
Let us briefly comment on Tom’s budget as listed above. Tom is 30 years old and has a wealth-building plan as explained in the previous article - number 4.
- Retirement account. If he contributes $150 per week to an investment account earning 10% p.a. for 30 years, his fund will grow to $1.3million.
- Emergency fund. This protects Tom’s retirement account. When disaster strikes, Tom withdraws money from the emergency fund. He lets the power of compound interest continue generating big profits in the retirement account.
- Savings account. It teaches him the financial discipline of saving and buying cash and also saves him thousands in credit card fees and interest.
- Entertainment and donations. Life is also about enjoyment. It is also about making the world a better place by helping the less fortunate.
- Personal Development. The famous motivational speaker, Jim Rohn, said, “Formal education will make you a living; self-education will make you a fortune.” Tom attends seminars and buys books on personal-development and small business.
I guess you know this week’s homework.
If you need help with your personal budget or if you need a more detailed solution, please feel free to send an e-mail to GeorgeChege@AjabuAfrica.com
HOMEWORK NUMBER 5 – Prepare your own 5-fold Budget Solution on a card and put it in your wallet. Take 5 minutes at the end of every month to review it against actual expenditure. If you do this simple budget, you will be ahead of 90% of the population.
1) You don’t have to be successful to start, but you must start to be successful.
2) Failure is essentially a series of little errors of judgment; repeated again and again.
3) Change is the essence of life. The more you avoid change the more you hinder the process of growth in your life.
4) You either make excuses or you make money, but not both.
These articles are intended for educational purposes only. Please seek professional advice on tax, accounting, investment, legal and similar matters. Each case requires personalized assessment with regard to individual preference and local laws.
Personal finance article 5 by George Chege, GeorgeChege@AjabuAfrica.com