The word Budget came from the French word “Bougette” which means the “the little bag” – a wallet in which one’s monetary possession could be kept. Over-time this “little bag” gave way to a battered red briefcase typically carried by the Chancellor of the Exchequer in the UK and used to depict the annual budget of the State. The act of budgeting has evolved over the years and is now adopted by Governments and Corporate Organizations as a compulsory planning tool critical to achieving sound financial goals. If it is important to nations, it certainly is important to you as well.
By definition, a budget is an itemized forecast of expected income and expenditure for some period in the future. Today we have National Budgets, organizational budgets and project budgets. My interest today is to talk about Family Budgets. Okay this is where I know some of you will switch off. But hang in there with me for a minute. I promise this won’t take long. There are different misconceptions about budget and I wish to confront some of them. Let’s start by looking at what a Budget is not?
- A Budget is not the same as setting financial goals. It might seem related, but it is not the same thing. Simply put, a budget is a forecast made up of estimates while financial goals are targets and objectives subject to the acronym S.M.A.R.T.
- Budget are not long term documents. They are usually short term. One year and below.
- Budgets are not cash flow statements. While cash flow statements can be adjusted and modified month after months, budgets cannot be modified.
Family budgets are essential tools to achieving financial wellness in a family. They are important in helping to track actual income and expenditure items and matched to the budget so we can evaluate accurately our financial position and determine our financial state of health. Usually, most budgeting will afford you the chance to track actual income/expenditure and match to budget. If your budgeting tool does not do this, please ask for a refund.
Before you start preparing your family budget, you need to identify your major and minor income and expenditure items. Write them on a sheet of paper and thereafter arrange them under major sub-headings. For example items like Groceries and utilities will fall under House-hold expenses, while expenses like School fees and child care will fall under Children Expenses. When you are done doing this, you are basically ready to flesh your budget with figures. To prepare a household or family budget for between 6 – 12 months, take note of the following tips.
- Keep Track of Macro-economic factors – For instance, what is the Year on Year Inflation rate? The inflation rate is usually available on the central bank’s web-site. It’s no use budgeting for an item at the same cost as it was last year. Add inflation to it. Other indices like the FX rate is also relevant. If there have been a devaluation for instance, you might want to know the percentage of devaluation so that you can apply it to your budget.
- Obtain inputs from all contributory factors – If your child is going to be entering secondary school for the first time, you might want to find out what are all the other associated cost aside from just paying the tuition. Don’t act surprised to be told after paying school fees that there is some extra curricula to be paid for as well. If you are going to have a baby in 9 months, budget not just for delivery but delivery by CS while also adding ante-natal and child care. I know most of us are people of faith and we like to say stuff like “God Forbid”, but have you ever wondered why houses are built to be storm and flood proof?
- Decide on a cut-off date – What gives your budget bite is the fact that it cannot be changed once it comes into force. So decide on a cut-off date after which you will no longer add or modify any previous inputs. These are the tips that makes multinational organizations succeed. Once a budget is approved, it simply cannot be change. Understand that if the reality (in terms of actual) is far removed from what you have budgeted, then that reality becomes a feedback rather than a failure.
- Do not tinker with the budget once it is finalized – A budget that is subject to changes and modifications monthly is no longer a budget but rather a glorified cash flow statement. Exercise the discipline to leave your budget as it is and not modify it until the expiration of the period. Over-time as you prepare new budgets, you will be able to use the feedback from previous tracking of Budget vs. Actual to arrive at a more realistic budget document.
- Budget for contingencies – When you are done with your budget estimates, always allow for between 5 – 10% of contingencies. Call it an emergency fund or stabilization fund or whatever. If in the end you don’t need it, you lose absolutely nothing.
Having a budget in itself is not what would guarantee you financial freedom, but it is a good place to start your journey. It reflects a level of planning that shows you are indeed serious about monitoring and controlling income and expenditure patterns for the duration of the budget.
Don’t be intimidated by the word. When you think budget, think of that “Little Wallet Bag” that doesn’t just contain your monetary valuables, but also memorabilia like pictures and other important documents and cards. Things you do not want to forget. Stuff you want to easily track at your finger tip.
Make a commitment today to start a family budget.