Budgeting 101: The basics of budgeting

Here we are again! You thought you could save money and still make it to month-end, but something happened. You don’t exactly know how, but we’re a week before month-end all that money is gone (well, it didn’t disappear. Spent is the word). You realized you ‘needed’ this bodysuit and pants you had just seen in Legit; a face serum, sheet masks, a few lunch dates and some other things you can’t remember. And it all seemed logical, right after you said: ‘Oh, walye waa, this year is rough. I deserve nice things.’…

And you do deserve nice things. You also deserve bacon and a real meal for dinner before pay-day. You deserve boss shoes, savings, a girls’ trip and your dream car. You also deserve that million-dollar status one day. Yes girl, you deserve nice things! There is a way to get all the nice things you really want. You know, the things you see in your day-dreams, the dream life-style and not just the things that look good to the eye in this instant… No shade to eye-candy pretty dresses, face serums and body suits…They’re great and all, but you have a bigger dream. And I’m saying there is a way to get the eye-candy stuff now and get the dream too. It’s called a budget.

So, what is a budget?

A budget is a plan that you create to show how you will spend your income. A budget tells a story of how much money one is expecting to earn and how they are planning to use it. Money is finite, and a budget allows you to plan and prioritize where it goes. A budget is a tool that you use to allocate your income to your expenses, savings and investments.

Types of budgets

For the purpose of this post, we will focus on 4 types of budgets, explained below. The type of budget that one ends up using is mainly based on their preference. 

Zero-based budget – This budget type allocates every dollar that you earn to expenses. The name, zero-based budget derives from the fact that with this budget, the ultimate difference between your total income and expenses should be zero; which means you plan to use every dollar of your income.

Guideline: From your take home pay, first deduct your fixed expenses (rent, car payment, other debt, etc.). And then deduct savings, food, entertainment and all other expenses until you have nothing left.

50/30/20 rule – The 50/30/20 rule is a type of budget that allocates 50% of your income to your fixed expenses; 30% of your income to variable expenses and 20% of your income to saving towards your financial goals.

Guideline: The 50/30/20 rule works with the ideal allocation of income towards the different categories of expenses. This budget type guides that 50% of your total income should go towards fixed expenses (like rent, debt and other expenses that NEED to be paid monthly at fixed amounts); 30% should go towards variable expenses (i.e. food, entertainment and other non-recurring expenses). The remaining 20% of your income should be saved towards your financial goals.

The 50/30/20 rule is practical. Even if you are using a different type of budget, you can use the 50/30/20 rule to determine if your priorities are in line and if you are overspending in some areas. For example, if your fixed expenses take up over 50% of your income and you only save 5%, you would need to make some changes. – Find ways to reduce the expenses, increase your savings, as well as ways to increase your income.

Flexible budget – The flexible budget system prioritizes your fixed expenses and savings. After these are taken care of, whatever is left in the bank can be spent on whatever you want.

Guideline: For this budget type to work, you need to automate your fixed expenses and savings, to make sure that they are taken care of and out of your bank account first before you start spending. You also need to be disciplined enough to cover your variable needs like food, before you spend everything on wants.

The envelope system – With this system, you withdraw a specific amount of money that you divide and store in categorized envelopes. You then use this cash from the envelopes to pay for the respective specific expenses.

Guideline: Studies have proven that most people are more likely to allow themselves to spend more when they use a card than when they use cash. Now, cash may not be practical in many instances, which is why I advise only using this system alongside other budget types. This is because most people tend to overspend on variable expenses like food, entertainment, clothing, etc. You could therefore use the cash envelope system for expenses in these categories.

Budgeting in practice

I have never met or heard of anyone who was negatively affected by using a budget. You will save money when you start having a plan for it, you might even start feeling like you got a raise. The ideal time to budget is before the money hits your account, and you shouldn’t touch a dollar before you create the budget. It also helps to be disciplined enough to stick to it. Discipline is not boring. You can still have fun, reach your goals and live your best life on a budget.  

You can create a written budget with pen and paper, or you could create one in excel. It doesn’t matter; it just has to work for you. I have a free downloadable easy budget template here that you can customize and fit to your situation.

Have fun budgeting!