Money, like any other resource, needs planning and preparation. When you actually put your expenses and your incomes down on paper with some kind of plan, then that is when you can really figure out how healthy your finances are and whether certain changes need to be made or not.As an estimation, a budget is a tool that allows you to think carefully about how you income will be divided among necessary living expenses, savings and investment during a certain period.
What information does the budget give you?
- Different types of income sources
- Amount of income by source
- Total planned income
- Types of expenditure, including business and household expenses
- Total planned expenditures
- Total savings
A household budget can take on many different styles and shapes depending on who you are and what you need your budget to be capable of achieving.
The three key steps of a budget as follows:
STEP ONE: Estimate the amount of regular and irregular income per month.
STEP TWO: Divide your income among the following:
- All anticipated expenses and amount needed for each expense.
- Amount required for repayment of loans, if any.
- How much you want to save to meet short-term or long-term goals
STEP THREE: Calculate whether your estimated total income is enough to cover total spending.
If income exceeds expenditure, you have a budget surplus. You should save this surplus income to spend during times when income might be lesser or expenditure will exceed expected expenses.
If expenditures exceed income, you have a budget deficit. The idea is to prepare yourself for these months using your financial plan. Another thing which might help is to spend less during the low-income periods.
Issue 1: Irregular income per month
Ask yourself: what time of the year do you have a little more money? When are you short of money?
Use a calendar you can see that income and expenditures vary depending on seasons, activities, religious and social events as well as life events (for e.g. births or deaths). This calendar can be used as a tool to estimate income and expenditure trends while making a budget.
Issue 2: Staying within the Budget
Try the simple but effective ‘Envelope Technique’. Organize your household spending into the following five categories: Business Expenditure, Household Expenses, Debt Repayment, Short-Term Expenditure, Long-Term Expenditure.
In order to better manage your money, at the beginning of each month you can allocate an amount for each of these envelopes and then divide their money between these. It is not important for savings to be in thousands. A little amount is also a contribution towards short term or long-term savings goals.
This is a great way to keep savings separate and out of reach, so that it is not spent and keep track of your spending.
Issue 3: Expenditure Exceeds Income
See if any of the following can be applied by adapting it to your lifestyle or skill-set:
| Ways in which a household can earn more money | Ways in household can spend less money |
|---|---|
| 1. For farming communities, a change in crop cultivation may be suggested. The idea being that faster selling vegetables would increase household income | 1. Buy household items in wholesale in one go instead of on credit |
| 2. Utilising skills that the entire household has: have you considered encouraging your son/daughter to babysit or offer tuitions for the children in your neighbourhood? Perhaps your wife or you can utilise their writing skills to work part-time for an NGO? | 2. Plan ahead to buy necessities when the prices are lower |
| 3.Ask for a pay rise at your current job. People are often scared to do this, yet why not simply ask – the worst that can happen is they say ‘no’. Simply ask for an appointment, prepare your points – which should be more about your job role than ‘I need the money’ – and see what happens. It’s just as difficult for an employer to say no when you ask, as it is for you to ask in the first place | 3. Get second-hand books from other students |
| 4. Start a kitchen gardening for own consumption | |
| 5. Recruit everyone in the house to spend less money on household utilities | |
| 6. Be creative when planning outings: picnics at the beach or one of the many parks in the country which are getting cleaner, with home-cooked food or sandwiches are a great and inexpensive way to spend time with the family | |
| 7. Carry less money or save money in a safe place (thereby avoid temptation to spend) |
The tracking of your financial transactions is helpful for managing your money. You can always refer to the recorded information to check past transactions as well as to inform future planning.
Some documents or records commonly used in Pakistan and the information they provide are below:
| Financial Documents | Information Provided |
|---|---|
| Budget | Projected income and allocation to different expenditures |
| Loan agreements | Amount of loan, duration, installment amounts and due dates |
| Savings Passbook | Amount and date of savings withdrawals and deposits |
| Bank Statement | Deposits, withdrawals, interest earnings, fees on bank accounts |
| Insurance Agreement | Insurance payments, premiums, coverage terms and conditions including procedure of how to claim |