The secret of financial success is to spend what you have left over after saving, instead of saving what is left after spending. – Anonymous
The Concise English Dictionary defines a budget as a summary of probable financial outlays and incomes over a specified period or the total amount of money allocated for a specific purpose during a specified period.
The same dictionary defines budgeting as the act of planning the expenditure of money or time. It is all about planning and just as a common phrase reminds us, he who fails to plan, is already planning to fail.
Budgeting, a consideration of both time frames
We cannot go back into yesterday and we certainly cannot leap into tomorrow but budgeting allows us to take cognisance of these time frames in our finances by learning from our yesterdays and planning for our tomorrows. It takes cognisance of both past incomes and expenditure patterns and also takes the future into focus by planning for it.
Budgeting implies planning and to bring a plan into fruition requires discipline, which, like I have always said, is an exercised control over tendencies.
For all practical purposes, we are going to look at the right budgeting procedures for two different levels of individuals – the ‘debt-free’ individual and the ‘debt-servicing’ individual.
Debt-free budgeting: 10:10:10:70
This is budgeting prescribed for a ‘debt-free’ individual and this person is not one that has absolutely no debts to pay but one, in my view, whose debts are not substantial, considering his annual income. Specifically, if a man is capable of paying off all his debts with between two and three of his gross monthly income, then I consider him debt free. Anything beyond this, I do not consider debt-free.
Now, I will go into some detail on the kind of budgeting normally prescribed for a ‘debt-free’ individual:
The total income of an individual represents 100 per cent of his income and it is divided into 10:10:10:70, for a ‘debt-free’ individual, representing the percentages his income should be divided into.
The first 10 per cent should go into penance or charity, the next 10 per cent into savings, the next into investments and the last 70 per cent into spending to maintain lifestyle.
Saving is indispensable and, along with its sister-concept, investment, is the basis of all wealth creation, when its progenitor, hard work, has been taken into due cognisance.
Wisdom is it
We must be wise in these matters for a wise man did once ask, ‘how did a fool and his money get together in the first place?’ The Danish have a proverb that says, “money saved is as good as money gained,” and things turn out best for the people who make the best of the way things turn out, was the way Ty Boyd put it.
Debt-servicing budgeting: 10:10:10:10:60
This is the formula that is prescribed for the individual that finds himself in a substantial level of debt, specifically in a debt that two or three of his monthly income would not liquidate.
The only difference here is that the 70 per cent dedicated to lifestyle expenditure is further divided into 10 per cent for debt servicing and 60 per cent for lifestyle. The Good Book says, “A wicked man owes and refuses to pay.” Paying off your debt will say a lot about you and will prevent future doors from closing against you.
In the right order here, the first 10 per cent should be committed to penance or charity and the next to debt payment, then the next 10 per cent into savings and yet the next into investments and the 60 per cent into lifestyle expenditure.
The budgeting pattern I have advocated here is only a prototype and is flexible to suit the individual. For instance, some of us may find out that our income levels permit us to save and invest more than 10 per cent of our income levels. If that is the case, then we should not hesitate to make a habit of this.
However, sound personal finance practices do not permit that we save or invest less than 20 per cent each of our income levels; no matter how small they are if we are to ‘escape’ from the shackles of poverty so prevalent in this emerging society.