Does Budgeting Really Work?
We don’t think there’s ever been an unstable, unpredictable, and inconsistent economy like the one we currently have today. It’s 2023 by the way and yesterday’s prize is never today’s own.
We are living in a world where delayed gratification is almost never rewarded and it seems that people who know how to “chop life” are the ones truly living. If you’ve saved for something with an amount in mind and went back to purchase it only to find out the prize has gone up, you know exactly what I’m writing about.
It’s just a weird time financially (and truthfully, emotionally) for Nigerians — fuel subsidy has been removed and the Naira is floating. Due to the removal of fuel subsidy, 1 litre of petrol is over N600. N600! Just the other day, the Central Bank of Nigeria (CBN) announced a change in the MPR (Monetary Policy Rate) to 18.75%. This MPR is the benchmark for interest rates in the economy. This was another anti-inflation measure by CBN but it only seems like the pressure is getting worse.
In 2022, the National Bureau of Statistics released information data that showed that about 130 Million Nigerians are poor which was a whopping 63% of the entire population. Back then, things weren’t as bad. The price of fuel and the cost of living weren’t this high. Imagine this number today.
It’s almost like everywhere you turn — it’s red. Just low battery on the financial side of things. With this grave economic downturn, experts still advice you to budget, save, invest, have an emergency fund, make plans for retirement, and all the other 100 steps to financial freedom.
Will budgeting work in a tight economy like Nigeria or are we just deceiving ourselves? Before we can answer that question, let’s talk about what budgeting means and why it is even important in the first place.
What is a Budget?
The word ‘Budget’ dates back to Old Latin and it means a leather bag used for carrying supplies — such as water, food, and other necessities someone may need. This dates as far back as 1760. And as the world evolved, the word also did to fit into newer realities. But the original meaning is not lost. A budget is a way people prepared for a journey or a trip. Today, this is still what a budget means. Cambridge Dictionary defines a budget as a plan to show how much money a person or organization will earn and how much they will need or be able to spend.
The most important components of a budget are:
It has to detail how much money flowing in (i.e income)
And also detail how much that will be flowing out (i.e expenses)
You can’t have a budget from money you don’t have or money that someone promised you. You can’t make a plan off of those. It has to be your income, your profit, your salary. Your money.
Then your budget should break down how much of that income you intend on spending and what you’ll be spending it on.
How Does Having a Budget Benefit You?
- It Helps You With The Big Picture
The easiest thing to become in an economic downtime is stuck on survival. “Let the poor breathe”. “I just want to survive today”. “Tomorrow’s battles will take care of itself”. These statements are a cry for intervention. Don’t get me wrong, I’m not saying you shouldn’t cut yourself some slack. I’m only saying cutting yourself too much slack could result in finding yourself in a rot. With a budget, especially in these tough times, you can plan and prepare for your long-term financial goals. You won’t be just living in the moment, splurging on the trendy phone or car. You would be able to see your goals, save towards them, and see your dreams come to life.
2. It Helps You Cut Your Clothes According To Your Size
Overspending is a common financial challenge in the world. In a bid to feel among or belong to a class, people spend the money they don’t have. Did you know some people borrow money to buy clothes to go to a party they got an extra invite to? People are in bad debt because they wanted to buy something they didn’t need in order to keep up with the Joneses. If you create a budget and stick to it, you’ll never have to overspend or find yourself in debt because of an expense that was quite unnecessary.
3. It Helps You Be Prepared for Emergencies
Life is full of surprises. It could be sunny one minute and the very next minute, it’s a rainy day. A health emergency may occur, or maybe an immediate job loss, or even something really good like an old application finally coming through and you would need to be ready for either of these things. Having a budget helps you plan for emergencies. One of the plans in your budget can be an emergency fund where you save a certain percentage monthly and only withdraw it for true emergencies.
Read more on the importance of creating a budget on Investopedia.
Does Budgeting Still Work in Today’s World?
Yes. Yes. Yes, a thousand times.
Meet Fatima, a 28-yr old woman living in Lagos. She’s an associate accountant at a top consulting firm. She also makes and sells ready-to-wear clothes for women on Instagram. Her total monthly income is usually between N650,000 — N700,000. In early March, she realized that this money usually runs out before the third week of the month. Sometimes, she would have to ‘bootstrap’ from her friends to sustain herself till her salary drops or a customer places an order. She realized that she couldn’t even tell where most of the money was going. Of course, she put N100,000 back into her business, but where’s the remaining? This was what led to the switch.
Before her April salary dropped, she decided to take this budget thing for a swing. She sat down to divide up her money and then she realized three important things:
- There was some lifestyle pattern that she had that was too high for someone earning the kind of income she had
2. There were a lot of unnecessary things she uses her money for. She realized she was always out every weekend. If she isn’t brunching with her girls on Sunday, she’s overspending on groceries and clothing materials on Sunday.
3. She buys things on impulse. She didn’t know how much of an impulsive buyer she was until she sat down to count the cost.
So, she drew up a budget with the famous 50–30–20 budgeting rule. The 50–30–20 rule is one of the oldest financial principles of all time. It’s an income distribution method.
Here’s what the rule states:
- Divide your income into three portions — a 50% part, a 30%, and a 20%.
2. Use the 50% for your needs. Needs are a must-pay bill. They are things that are extremely important for your survival. Examples of needs include rent, utilities, health care, groceries, etc.
3. The 30% goes to your wants. These are the things that you buy that aren’t absolutely necessary for your survival. They usually are things you enjoy or that makes you feel good. Travel plans, entertainment, tickets to events, and new clothes, are in this category.
4. The remaining 20% is for your savings. You can save towards a goal or just create an emergency fund.
The 50–30–20 rule is the best route to go if you’re new to personal finance and financial management. With this rule, you’re setting your priorities straight and making sure your money is well managed. In case you’re thinking, 20% is too small to save, you’re probably right. But you want to learn the rules before you start to break them. Try this easy rule consistently for three months and you can adjust as you have more clarity as to how you should be spending your money.
How does the 50–30–20 budgeting rule benefit you?
If you’ve always thought about financial freedom, this is a good place to start the journey. There are other benefits to adopting this budgeting rule:
- It helps you gain financial stability: If you adopt this 50–30–20 budgeting rule, you’re introducing stability into your financial life. You know that for every income you get, this is how your money will be divided. It helps you stay on course and stick to a routine that will eventually contribute to your prosperity.
- It helps you make sure you save: People sometimes say savings have gone out of style but it isn’t true. Not everyone out there is spending all of their money at a go. People are saving, investing, and looking for investment opportunities. You should too. This budgeting rule makes sure that you save at least 20% of your savings every month no matter how little or how large your income gets.
- It helps you track your spending: Nothing keeps you on track than looking at your 50% column and seeing your needs met. It will help you track your 30% too. You know that all the items under your 30% column aren’t absolutely necessary and then you catch yourself removing some expenses and thinking about more important ones.
- It’ll help you in the long run: The financial independence everyone talks about isn’t usually attained in a day. You have to take your time with it, learn the ropes, make mistakes, adjust your plans, and go again. This 50–30–20 budgeting rule will help you learn that you should always set a certain percentage of your income (at least 20%) for savings and investments. At the end of a year, you would have been 240% richer in savings and investments.
What does a 50–30–20 budgeting rule look like today?
Remember Fatima who earns N650,000 — N700,000 monthly?
Let’s show you what her monthly budget will look like:
50% of her income will go into her necessary expenses such as housing, food, utilities, black tax; etc. This means that N325,000 of her income will be budgeted for these compulsory bills.
She’ll have exactly N325,000 left.
Then 30% of that (N195K) will go into secondary expenses; wants that she can do without. Entertainment, friendships, family care, emergency savings, etc.
The remaining 20%; N130,000, goes locked up in her savings plan. And if she saves this money in a Reserve Plan on the Moni App, she’ll be earning up to 21% at the end of the year. By the end of the year, she’ll have 1.5 Million naira in savings and N327,6000 in interest earned.
The first step towards any financial freedom or liberation is crafting a budget. Get started today and let us know how it’s going on social media.
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