Budgeting is very important if you want to have any savings at all. I am a mother of 2 and my husband pays for almost everything in the house, yet I still find that I have no savings to boast of even after two years of working.
What I have realised is that, money is never enough. So if you don’t have a budget and watch your spending you will find that you have nothing to show for your hard work.
There are two ways to budget;
The first method is to figure out what your income is, then start spending according to what you’re earning (live according to your means.) The second approach to budget is to decide how much you spend every month then find ways to force your income to match your spending. These methods are further explained below;
1. Income-Expenses budgeting method
A budgeting method proposed by Harvard economist Elizabeth Warren and her daughter, Amelia Warren Tyagi is the 50/30/20 budgeting method which says devote 50% of your income to needs, 30% to wants and 20% to savings and debt reduction.
So you have to look at your income “how much do you make?” then base your spending on what you make, this approach is the most popularly budgeting method used by people.
The good: It ensures that you live within your means
The bad: You have to cut cost (rather than increasing income) and this might feel like you’re dieting, i.e. financially and can be hard for some people. This approach is best for salary earners who have a steady income.
2. Expenses-Income Approach
This approach is less common, but it works. In this approach, you have to make a list of things you spend money on on a daily basis, then instead of cutting out anything, you have to figure out how to make enough money to meet your expenses as well as have savings.
If for example you spend money on;
- House rent
- Foodstuffs and groceries
- Insurance and tax
- Household supplies
- “Fun” money
- Retirement savings
- Home, car repair and emergency funds savings
And you spend NGN100,000 per month, but you’re currently earning NGN90,000 instead of cutting anything out of your expenses list, your target should be how to earn NGN150,000 or NGN200,000 per month. This way you can cover your expenses and still have some money left over to save.
You might decide to have a side hustle to increase your income or having an investment, you might even decide to start applying for jobs that’ll pay a higher salary.
This approach focuses on “generating more money to meet your expenses” instead of “cutting your expenses to meet your income.” But do not use this approach until you’ve actually found ways to make more money. And ensure that both your spending and savings increase with every pay raise.
The good: It empowers you to double your hustle and make more money to meet your needs so instead of cutting cost, your attention is on making more money.
The bad: It can lead to extravagant spending unless you intend to save a bigger percentage of your income.
It’s best for business-minded people who can dive into various fields and people who have multiple ways where they get money from.
I chose the income-expenses approach as a salary earner, so when my NGN500,000 salary enters each month, I immediately transfer 30% of it into my savings account, and the rest goes to my needs and wants.
If you have someone that caters to almost all your needs, you can even save more than 20% of your income. The income-expenses approach worked for me, but you can try the expenses-income approach to see if it suits you.