Budgeting 101

Budgeting 101

There aren’t many tools at your disposal that will help you manage your finances like a budget. In its basic form, a budget is a plan that lets you reflect on how much money you make and how you can apportion it across your various expenses.  

What is the impact of having a budget? 

Let’s imagine that you earn a salary of UGX800,000 a month. You have two options of how you can spend that said income. You can decide what to spend on, on a case-by-case basis; every time you need to eat, when you spot a nice pair of shoes, or receive a utility bill, is when and how you spend.  

Alternatively, you can anticipate all your future expenses, like food, clothing, rent, or even fun activities and decide how much to allocate to those items before the occasion for spending on them arises.  

As you might imagine, with the first method of spending, you run the risk of running out of cash before the month is complete. This is because you have a short-term view of your expenses. Sure, you have UGX800,000 at the start of the month, so you can easily buy a UGX600,000 pair of shoes. However, what happens to your other key expenses like food, rent, bills. Is what is left be catered for in your salary?  

Clearly, spending three quarters of your income on a pair of shoes you can't afford before purchasing your basic needs is not the smart way to manage your finances. Ultimately, this is the power of your budget; helping you control your spending like you are living beyond just today and start consciously spending for the future you want.  

How can you get started with a budget

Creating a budget is a personal organizational task, for obvious reasons that what you earn or how you spend won’t look the same for someone else. People with families of different sizes will budget differently among themselves and most certainly different for individual budgeting for their personal needs. Similarly, someone earning UGX800,000 will budget differently from a person earning 10x more than that.  

While each person's allocations will differ, there are some key accepted guidelines that can help you draw up a solid budget to suit your personal needs. It is important that you plan for these in this specific order.  

  • Fixed Costs: 60% - 70% 

Fixed costs are expenses you need and must incur in the course of your earning cycle. These expenses include your rent/mortgage, electricity and gas bills, food, school fees, transportation costs are all expenses you must pay and plan for. If you earn daily, your cumulative income over the period of a month should be able to help you cover these expenses.  

Tip: Notice that we include school fees. While you might not pay this monthly, budgeting for it as a monthly fixed cost allows you to gradually accumulate what you need to pay when schools demand the full sum. Apply this for other fixed costs that don’t necessarily occur on a monthly payment structure but may occur quarterly or even twice a year.  

  • Savings and Investments: 10% - 20% 

For many people, saving and investing is one of the most uncomfortable financial habits to maintain because of their personal mindsets as consumers and not investors. Afterall, there are always enticing ways to spend and enjoy your money, without thinking about what will happen tomorrow.  

Alas, we can’t avoid a future with health emergencies, abrupt expenses and even death that cause serious financial shock if we’re not prepared. This is where savings and investments come in handy. Think of saving as keeping away a small amount for your future needs, and investing as the vehicle that will help you grow these savings faster than the rate of inflation.  

Tip: Fortunately, with XENO Investment you can start doing both at the same time. Your savings can be allocated into interest-earning funds like an emergency fund that will help you cater for the unexpected.  Set up AutoSave to automatically deduct your allocated savings and investments whenever you earn.  

  • Reward Spending: 10% 

Finally, once your fixed expenses, savings and investments have all been allocated you now have the amount of money you can freely enjoy as the fruit of your labor. Typically, this is referred to as guilt-free spending because it does not compromise your key financial expenses.  

Other Important Expenses:  

  • Giving: (Percentage depends on your personal values)  

Your budget should reflect your personal values. In some cultures, and religions, one is encouraged to give back a percentage of their income. It may be a Tithe for Christians or Zakat for Muslims, or simply a donation to your local community or interest group. Whatever the case, you can plan financially for these gifts within your budget.  

A Last Word on Sticking to Your Budget  

Creating a budget may be half of the challenge, but the other half is sticking to it. Gaining the discipline to maintain your budget requires practice.  

  1. Begin by writing out your budget and memorizing where your expenses fall into place.  
  2. Consecutively give your budget a revision every month, after each earning cycle, so that you can address any changes that may arise. Eventually your budget will become a guide that helps you understand your boundaries.  
  3. Know what to pay first: Pay off your fixed costs first, inlcuding your rent and any bills so that your basic needs are met.  
  4. Put into mechanisms like automation of your savings and investments and saving plans for fixed costs like your children's school fees, which can help you ensure that whatever you have left is for your fixed spending.  
  5. Set aside your guilt-free spending so you know how much you have for specific activities. Thereafter this figure will become your cut off point for guilt-free spending in the month.  

Note: This template has utilized a framework that takes into account your budget on an income that's deducted tax. If you are self-employed or a business owner, you are responsible to account for these before you determine your take home income.  

Start from as little as UGX 10,000 or KES 500

Saving money is an excellent first step toward financial freedom. Start your journey today.