The Ultimate Personal Budgeting Guide

If you live in Nairobi and earn a monthly salary of, say, Ksh80,000, how can you pay for your housing, food, debts, healthcare, and other expenses without running out of money? How can you survive the month without going broke? 

The solution is budgeting.

So, what’s a budget? A budget, aka a spending plan, is an estimate of your income and expenses over a specified future period.  It’s a roadmap of where your money will go. As such, it helps you determine in advance whether you have enough money for whatever you need to do or not.

To build wealth, you must live by a budget. However, getting started with budgeting might seem daunting and restraining. For instance, it could mean forgoing Pizza with your significant other to save for retirement. 

Don’t worry, though. In this comprehensive personal budgeting guide, you’ll learn how to create a budget, tips for successful budgeting,  budgeting strategies to help you save money, and more!

Without further ado, let’s get started.

Why Do You Need a Budget?

If you don’t budget, you’re likely to live from paycheck to paycheck or struggle with finances. You’ll reach the end of the month and wonder what happened to your money. Here are some more reasons why you need a budget.

1. Budgeting Stops You From Overspending

Most people who don’t follow a budget spend more than they earn. As such, they end up accumulating debt. This will limit their future spending habits because whatever they'll be earning will go into debt repayment. They'll have nothing left to pay for essentials such as food, shelter, and school fees.

2. Budgeting Helps You Reach Your Goals

With a budget, you can prioritize your spending. This is because you can allocate your money to the things that are most important to you.  Such goals could be:

• Repaying your student loan
• Starting a business
• Saving for a home and so on

Your budget will help you create a plan to save money to achieve these financial goals. You can also use it to track your progress to ensure you're on course to achieve your goals.

3. Budgeting Helps You Save More Money

People who have not embraced budgeting tend to have less money than those who do. This is because when you budget, you can allocate money for certain things including savings. As you do this, you build wealth. Eventually, you’ll achieve financial freedom.

As you’ve seen, a budget is an essential financial tool. But how do you create a budget?

How to Put Together a Successful Budget: 6 Actionable Steps

If you’re looking to create a personal budget, follow these simple steps:

Step 1: Calculate Your Monthly Income

Knowing your net income is the foundation of an effective budget. Your net income refers to your total wages or salary minus deductions such as taxes, health insurance, and retirement contributions. 

If you don’t know your net income, you can overspend because you can easily think you have more money than you do. If you’re self-employed or are a freelancer, you need to keep tabs on your contract and payment to help manage your income.

Step 2:  Record Your Spending

After calculating your monthly income, the next step is to track your spending to know where your money is going. This way, you’ll know what you’re spending most of your money on. Besides will help you save. 

So how do you track your spending?

First, list your fixed expenses. Fixed expenses include regular monthly bills such as rent, car payments, student loans, and mortgages.

You should then list variable expenses. These are expenses that vary from month to month. They include groceries, entertainment, dating/love/family expenses, and medical expenses.

So, how do you track your expenses?  You can stick to the old school method and use pen and paper, use computer spreadsheets or use budgeting apps.

Step 3:  Set short-term and long-term financial goals

Setting financial goals will help you stick to the budget. Short-term financial goals are goals you want to achieve in say one to three years. They could include setting up a rainy day fund or paying your student loan. On the other hand, long-term financial goals could include saving for retirement or your children’s education. 

Step 4: Use Your Priorities to Set Aside Money

This is where the rubber meets the road. Check the variable and flexible list you came up with and prioritise what you’ll spend. For each expense, consider placing a spending limit.  

You can also break down your expenses between needs and wants.  For example, if you drive to work, fuel is a need. However, a monthly Spotify subscription may count as a want.

Step 5:  Adjust Your Spending to Stay on Budget

Now that you know your income and expenses, cut down on your spending to stay on budget.  A good area to look for what to cut down is your wants and monthly payments. For instance, consider watching a movie at home rather than going to the cinema. The little you save  can add up to a lot of money.

Step 6: Tweak Your Budget Regularly

After setting your budget, it’s critical to review it regularly. This is important because you may get a pay rise, you may clear a loan payment, or reach a goal and want to set a new one.

4 Budgeting Strategies that Can Help You Save Money

There are several budgeting strategies to help you stick to your budget. Here are some strategies you can use.

1. 50/30/20 or  Rule-of-Thumb Budget

The 50/30/20 budgeting plan is simple to follow. This rule suggests that you spend 50% of your income on basic living expenses, 30% on wants, and 20% on saving for the future.

This strategy is ideal if you’re just entering a new job and wondering what to do with the new paycheck. If you’re disciplined enough to follow this strategy, you’ll soon accumulate money in your bank to cater for future goals.

50/30/20 Rule Budgeting Example

2. The Envelope Budget System

This is another simple budgeting strategy ideal for people who primarily spend in cash. You can use it along with other strategies including the 50/30/20 rule. All you have to do is cash each paycheck and divide your income into different categories e.g rent, bills, groceries, etc. 

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You then decide the amount you’ll spend on each category and put the cash in separate envelopes as per the categories. The rule here is to spend only what’s available in that envelope for each category. This will limit your spending because for each category, you can only spend what is in the envelope.

3. The Zero-Balance or Traditional Budget

This strategy is probably what comes to your mind when you think of budgeting.  The idea here is to give every penny you have earned a purpose by allocating all you have earned to expenses, savings, and debt payments. Such that if you subtract your expenditure from your income, you get zero.  A benefit of this strategy is that it prevents you from spending what you don’t have.

Zero-based budgeting example;

4. The Pay Yourself First Strategy

This is a personal finance strategy that suggests that you should use your income towards saving and retirement first before focusing on other expenses. Although this strategy prioritises saving, it doesn’t mean negating other expenses such as rent, insurance, and groceries.

Tips For Successful Budgeting

Most people attempt to budget but lack the discipline. Here’s how you can create a budget and live by it

1. Set realistic  goals

Having realistic goals will help you achieve your target. Ask yourself what you want to accomplish with your savings in both the long term and short term. =

For instance, if you’re planning to buy a house next year, you need to start making down payments now. As you save, track your payments so that you don’t give up on achieving your goals.

2. Make incremental changes

Incremental budgeting refers to creating a new budget from the current one by making some changes in response to changes in your financial position. In a nutshell, you use the current budget as a base for creating a new one. You make these adjustments depending on what you want to accomplish.

3. Automate Your Payments

You can easily forget to contribute to your savings accounts or keep postponing until you realise you have already spent all the money meant for savings. However, by automating your savings deductions such as to your emergency fund, you can stay on track with your savings plan. Besides, automating your payments isn’t as time consuming as making the payments manually. 

In fact, you should also try as much as you can to automate the payment of your fixed expenses such as rent, such that there is no way you will be caught spending your rent money on something else such as entertainment. 

4. Use tools that work for you

There are numerous apps that can help you stay on track with your budget. Some popular ones include:

• Mint: If you don’t know how to create a budget, this is a good app to start with.  All you need to do is input your financial data. That's not all, you can link your credit and debit cards with Mint, set spending limits, and even specify the frequency of each expense.

• PesaDroid:  If you use M-PESA frequently, this app may be good for you. It monitors your transactions and generates cash flow statements.  As such, you can track your expenses and improve your spending habits

• Money Lover: This is another budgeting app tailored for the Kenyan market.  It allows you to manage your money in Kenya Shillings. You can use it to create a budget and track your income and expenses.

• Unsplurge: If you’re looking to save for something specific, then this app may be for you. It not only allows you to set financial goals, but also to monitor your progress in terms of how much you’ve managed to save towards your target goals. As such, it can improve your saving habits.
  

5. Review your budget monthly 

Lastly, you need to review your budget monthly. This way,  you’ll know when to make adjustments to your budget. Check if you overspent or have any money left and adjust your budget accordingly. Your priorities and needs will change over time, so you need to always review your budget.

Wrapping it Up

Hurray! You’re now equipped with essential budgeting skills to help you achieve your financial goals.  Start budgeting today. You’ll no longer reach the end of the month and wonder what happened to your money. Keep it here for related content.

Also read: The best way to invest for your child’s finance.