5 Best Tips for Budgeting
A tale of 2 jobs
My first job after university was over 10 years ago. I was earning N50,000 monthly at the time, just over $160 in today’s money. Interestingly I always made it to the end of the month with no problem. I had minimal savings, but I was okay.
Then I got another job… with a bank. My salary doubled and I had a fancy new title. Funny thing, now I could hardly get to the 20th of the month without running to my girlfriend for a loan.
Moral of the story? It’s not the size of the paycheck, it’s how you use it.
Over the years and a number of job titles later, I have learnt not only make my money last, but to actually grow it.
What’s my secret? A simple habit of budgeting.
Modupe, you say, why bother budgeting when I barely have enough to live on? I’ll start budgeting when I start earning real money.
The best time to budget is before you start to earn a lot of money. Budgeting is a habit that only gets easier over time.
There’s an African proverb that says that when a child earns his first pay, he spends it all on doughnuts. This is not just cause kids love and prioritize doughnuts, it’s cause they usually have no clear long term plans for their money.
So let’s talk about planning your money so you have some left at the end of the month and you can start growing that savings habit you’ve been telling yourself you need to start.
My first tip for budgeting is to Prioritize. In other words, Pay yourself first.
This is one principle that has helped me over the years. Paying myself here refers to investing in myself or in things that I consider really important for my financial future. What are those things that you know you should spend your money on but you always manage to push till next month? Savings, Tithing, investing… Prioritize those above your bills, your meals, or thrills Before paying any bills, put the money for those important things aside. Why? Because you know you have to pay your bills or else your electricity gets disconnected, the bank will seize your car or some other creditor will come after you. Unfortunately, no one will harass you to save, give, or invest in anything that will help build your financial future. You have to decide what those things are and start off your monthly spend with those.
Next, invest in paying off your debts. In a country like Nigeria where banks charge interest rates as high as 24%, paying off your debts as quickly and consistently as you can is one of the best investments you can make. See it as a 24% return on investment.
After paying any debts, then we can move on to bills, utilities and other essentials. Finally, leave a little something for fun. This will help curb the urge to dip into your savings in future.
Tip number 2 is to Automate
Once you’ve decided the key things you need to spend money on, set up automatic systems to make it easy for you to make the payments. You can do this via Internet banking, cheques, or direct debit instructions to your bank.
Internet banking is one key tool I use to keep to my budget. For a bank like GTB, you can pre-register some regular recipients like your stock broker or your church so it’s easy to make the monthly transfers any time of the day from the comfort of your bed.
Automatic Withdrawals/Direct Debits
Better yet, if your salary gets paid around the same time each month, you could arrange monthly direct debits with your bank. These are automatic withdrawals that happen on schedule each month without you having to prompt them. It makes it easy to stick to your budget.
A final option to automate your payments is to issue out post-dated cheques to your stockbroker or banker to be cashed based on a monthly schedule. I used to do this quarterly with my stock broker before I got comfortable with Internet banking; then each month I would follow up with instructions on which stocks to buy.
Tip number 3 is, as much as you can, Pre-Pay i.e. pay for stuff ahead of time.
This would usually apply to utility bills and other essentials. For example, I usually pay for at least 3 months internet subscriptions at a time. Also, when renewing essentials like my drivers’ license, instead of going for a 3-year renewal, I do a 5-year renewal. When I do pay for satellite TV subscription, I pay for multiple months. If you can pay multiple years for your rent, please do.
Aside the fact that you’re likely to get discounts when you pay in advance, it also means you lock down the rates for that period. As prices hardly ever come down, it’s always good to lock down rates for any regular expense. If you decide you are no longer interested in the service, say for instance, you need to move to another town, you can always get someone else to pay you for the outstanding period. As rentals go up almost every year, it will probably be cheaper for them to do that than to rent somewhere similar afresh.
As a Nigerian, another area you should pre-pay is any expenses in dollars. Not to sound pessimistic or unpatriotic but considering the US dollar remains one of the strongest currencies globally (at least compared to the Naira), paying for a domain name annually means you will be hit by any Naira devaluation within that year. You could easily lock down the rate for 10 years instead.
Another way to pre-pay is with your investments. Let’s try a small exercise. Which is better? Investing N120k in January or investing N10k every month for a year? It’s a trick question. Both are good. While the monthly investment helps you to develop the habit, when you look purely at the earnings, you make more when you invest the sum upfront. So for my friends who receive upfront allowances or bonuses in January, a great habit is to invest a significant chunk of that in a compound interest investment vehicle like money market funds.
However, there are some investments that you don’t really need to go into upfront. An example is shares. While the best time to start investing was yesterday and the 2nd best time to invest is now, there is such a thing as the perfect time to buy shares and there are times when you should just wait.
All this sounds so serious, you say… so when do I get to enjoy my money? Every month. I mentioned this earlier but it deserves a separate point. Tip number 4 is to Budget for fun. Plan for it. Don’t just wait for when you want something to look for the money. That way, you’re less likely to dip into your savings or investments when you want to indulge in a crazy weekend out of town or splurge on that new mobile phone or smart TV.
The only rule here is to make sure this comes last after you have paid for everything else. i.e. maintain the order of priorities. In some cases you may have to put this money aside for a couple of months to afford the intended purchase but trust me, it’s worth it. Your future self will thank you and who knows, a new model of the phone may be out by the time you’re ready to buy.
This also conditions your mind to learn to delay gratification. This is one of the most important habits of successful individuals.
My final tip for sticking to your budget is to do something I call Precrastinating. This is what it sounds like, the complete opposite of procrastinating. As much as possible, implement your budget immediately you get paid. Don’t wait a day or 2. Online banking helps a lot here. The reason for this is borrowers lurk & distractions abound. We all have that colleague or friend that always seems to need a soft loan sometime in the month. And while they may pay you back by the end of the month, you have lost out on whatever gains you could have made from investing the money. It’s better your cash is “tied up” in some investments than wasting in the bank. Even a savings account is not a great idea as it’s easy for you to spend it and the returns are not that impressive. Plus some banks only pay you interest on savings accounts if you limit the number of withdrawals in a month.
The rule while precrastinating is to make sure you follow your order of prioritization. This is important. Like we said earlier, once you’ve sorted out your giving and investments, you will find a way to resolve other stuff.
Before we end this piece, a little bonus from me to you. I’ll be sharing a breakdown of what my own personal budget looks like. Before I do that, a word on budget management tools. I’m aware there are a number of interesting apps out there but don’t get bugged down or be distracted by this. Honestly all you need, to make and keep a budget, is a notepad and a pen. I designed a simple Microsoft Excel template that I’ve used to manage my budget over the years and it allows me to outline everything I spend money on and modify over time as I see fit.
My budget is split in 3 key sections: Giving, Investing, & Spending, split roughly into 30%, 60%, and 10%. Please note that you don’t have to apply these exact percentages to your own budget. The important thing is to have a split that works for you and to stick to it every month.
About 30% of my income goes to giving. This entails what I give as tithes, what I give to my dependents, and what I give to charity. The next 60% goes into my investments. I’ll share a bit more detail here. The 1st item here is my loan payment. And I’ll say why. Paying down on bank loans is the most important investment you can make. I won’t go into why there are bad debts and good debts but once you have any debt with interest rates as high as they are in Nigeria (ranging from 20% to 28%), you should pay them as soon as you can. This is another area where I recommend precrastinating if you can. You’ll notice this is the largest single item in my budget and while I won’t suggest you max out your monthly payments at 30%, see this as an investment with 20-28% return.
Other investments I make include life insurance, savings in safer investment vehicles, more aggressive investments like stocks and lastly foreign currency savings.
The final bit of my income goes to monthly expenses and fun stuff. Some of these are actually not monthly as I try to pay for things like Internet, TV and electricity months ahead.
Those are my 5 best tips to making and keeping your own budget. If this information has been useful to you in any way, please do 3 things for me: share with someone that needs it, subscribe to www.youtube.com/modupesanda for more tips like this and most importantly, create your own budget today.
Have a good day and remember, It’s not the size of the paycheck, it’s how you use it.