Shaping up Your Finances. Go Budgeting!

Jul 10 - Shaping up your finances Go budgeting

Budgeting is a mechanism, which helps you to be financially in shape. Too often people make purchases without considering the financial consequences. Some people shop compulsively and then wonder why their wallet is empty. Living in moderation is the only way to earn financial security; it is a concept stated in a number of Quranic verses and Ahadeeth.

“And let not your hand be tied (like a miser) to your neck, nor stretch it forth to its utmost reach (like a spendthrift), so that you become blameworthy and in severe poverty.” (Al-Isra, 17:29)

“And the slaves of the Most Beneficent (Allah) are … those, who, when they spend, are neither extravagant nor niggardly, but hold a medium (way) between those (extremes). (Al-Furqan 25:63-67)

Budgeting is a comprehensive financial plan that helps you to:

  • live within your income,
  • spend your money wisely,
  • reach your financial goals,
  • prepare for financial emergencies,
  • develop wise financial management habits,
  • establish financial discipline,
  • feel financially secure about your present and future.

The budgeting process can be divided in four major phases.

The first step is to determine your current financial position regarding income, savings, expenses and debt obligations, if any. Estimate your sources of cash from the given time period, for which the budget is prepared. A common budgeting period is a month, since payments, such as school fees or utilities bills, are due monthly. In estimating available income, you should include only the money that you are 100% sure to receive. Bonuses, commissions, gifts or unexpected income should not be considered, until the amount is actually received.

Budgeting income may be difficult, if your earnings vary according to season or your income is irregular. In these situations, attempt to estimate your income conservatively based on past year and your current year expectations. Estimating your income on the low side would always help in avoiding situations that lead to overspending.

Budget allocations, with regards to expense categories, would depend on your life situation (whether you’re single, a parent with dependent children, or widowed with independent children, etc.).  Maintaining a detailed record of your spending for several months is a better source for understanding your spending habits and patterns.

Carefully analyze your expenses in your spending record. Review the records of your previous months’ expenditure. Using this as a starting point, write down your historical monthly expenses. Determine which ones of them are fixed and which are variable expenses. Fixed expenses are compulsory needs. Variable expenses are wants and desires and will fluctuate according to your household income, time of the year, health and a variety of other factors.

Through this you will be able to estimate your monthly expenses for the next month, which will help provide an adequate yardstick in gauging your future expense. Each expense category can be totaled and a percentage to total expenses can be calculated for it. If some categories appear too high, the decisions can be made to control spending in them.

Once you have estimated your monthly income and expense position, you have made a budget plan for the month. Now, you would need to record your actual monthly incomes and expenses in the budget sheet. The actual income and spending might not always be the same as planned; the difference between them will tell you whether your budget is on the track or going in a deficit. It may be necessary to review and revise your budget and financial goals on weekly basis.

The result of the budgeting exercise can be: 1) having extra cash in your hand at the end of the month or 2) falling behind in your saving plan by making extra expenses and so on.

On a quarterly and yearly basis, prepare a summary to compare your actual amounts with budgeted amounts and to determine if you are moving towards your targets. The summary would help you see where changes in your budget may be necessary. This review process is vital for successful money management and long term financial security.

Budget is a circular, on-going process. You, therefore, would need to revise it on a regular basis. You need to judge for yourself, whether you are making progress towards achieving your objectives. You need to evaluate, whether you have to change your financial goals due to changes in your personal or economic conditions.

What should be cut when a budget shortage occurs? The answer to this question is not easy and would depend on your individual household situations.

Having a budget would not eliminate your financial worries. A budget will work only if you are serious about following it. Changes in income, expenses and goals will require changes in your spending habits. Money management experts advise that a successful budget should be:

1. Well-planned

A good budget takes time and effort to prepare but is simple to manage. Planning the budget should involve everyone in the household who would be affected by it. Children should be involved, so that they learn the important money management lessons, while helping to develop and use the family budget. The estimates should be stated specifically and in measurable terms and have a definite time frame.

2. Realistic

If you have a moderate income, don’t expect to save enough money immediately for an expensive car or a lavish vacation. A budget is designed not to prevent you from enjoying finer things in life or to live miserly but to help you attain what you want most in life. An old saying goes: “If you don’t know, where you’re going, you might end up somewhere else and not even know it.”

3. Flexible

Unexpected expenses or emergencies will require an immediate revision of your budget. Hence, budget needs to be such that it can easily be revised. Special situations, such as illness, pregnancy and arrival of a baby or guests coming to stay, may increase certain types of expenses.

4. Clearly communicated

The budget plan will only be implemented if you and others contributing to the household budget is aware of it and can understand it.

5. Simple

The budget needs to be simple to manage; otherwise, it would be discarded in the litter. It should not be time consuming and painstakingly difficult to implement and follow.

In the end, creating a budget may not sound like the most exciting thing in the world, but it is vital in keeping your financial house in order. It is important to realize that, in order to be successful in making a budget, you have to decipher as much detailed information as possible. Ultimately, the end result will show you where your money is coming from, how much is there and where it is all going!

Budget worksheet samples are available at:

http://office.microsoft.com

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Pinching Paisas…

quart jar full of coins, pennies,nickels,dimes and quarters, with clipping path

Hiba continues its series on money management. In the second article of this series, Sumaira Dada, Noorjehan Arif and Aisha Ashraf Jangda talk to people and get tips on how to save money.

Whether you call it using resources responsibly, saving for future generations or just plain pinching Paisas, you know exactly what we are getting at. During the times of rising prices and falling incomes, we all need to look around for little tips on saving money. Here’s what we found.

First Step

The first step, in order to reduce the mountain of unpaid bills, is to start cutting off unnecessary expenses. Beena, a homemaker, cut down all the imported cosmetic items she used to buy. She started using local products instead. She also started making clothes for her children out of her old ones, all by herself! Monia, a Quran teacher, states that understanding the Quran helps in controlling her spending habit. On a witty note, she claims that wearing an Abaya helps reduce spending on clothes!

To cut the rising costs of electricity and fuel, you can control the excessive use of air conditioners during summer. Having mint-lemon drinks and wearing cotton and lawn clothes can do wonders in keeping you cooler! In winter, a better idea is to use warm clothes and blankets, which can help you, cut down on the fuel bill and also keep you warm.

Second Step

The second step is to be creative in fulfilling your needs. One enterprising grandmother used to make quilt blankets out of old cloth pieces! An aunt, who is known in the family for her taste in furniture, reused an antique sideboard from her mother, got it polished and painted so well that now she has placed it in her drawing room. A friend of my mother had a great idea of saving money on buying expensive paintings to put up around the house. She framed the 500-piece cardboard puzzles that her teenage children had discarded and hung them on the walls. Trust me; a framed puzzle usually catches any guest’s eye, just as it caught ours!

Third step

The third step is to start saving money with a group of like-minded people. Monia gives the idea of a Voluntary Committee (VC), a pool of funds, where every member puts in a certain amount of money on a monthly basis. At the end of the month, the entire amount accrues to a certain member. This helps to save a significant amount of money with little hassle. This discipline can be taught to teenagers as well, with an adult involved in safeguarding the money.

Quick Advice: Preparing an emergency fund is also very useful, as emergencies such as a job loss, illness, home or auto repairs, can be a significant drain on the finances. Most experts agree that you should keep between three and six months worth of your living expenses set aside in your emergency fund. Evaluation of your situation and the number of children in your family will determine what amount is best for you. Initially, you can begin with Rs.1000 a month and then increase the amount gradually. After a few months, you won’t even notice that Rs.1000 is missing, so you would be able to increase the amount you put aside. The best way to get started would probably be through your bank. Open up a new account in an Islamic Bank, if you currently don’t have one, and begin to save in it. The next step is to get into the habit of making regular deposits into this account. Once you make saving automatic, you won’t even have to think about it.

Working People

1) Saving Money at Lunchtime

We’ve all heard the advice to bring lunch from home to save money. But does it mean missing out on eating out with your co-workers?

  • Ask a few colleagues, if they’d like to join you in brown bagging lunch. Chances are they’d like to save money, too. You can set up a potluck in the break room or kitchen with everyone’s leftovers or favorite sandwiches. Not only you will get to know your colleagues better, but you will also be able to try a variety of foods. This may lead to recipe-swapping.
  • Avoid eating unnecessary and unhealthy snacks like chips, biscuits and ice-cream at work. They may be excellent munchies and you may want a crunch during that afternoon slump, but fresh fruits or vegetables brought along from home are more healthy and lighter on the stomach as well as your wallet.
  • Avoid eating out too often. Eating out is extremely expensive, and it leads to overeating, since the sizes of portions are larger than usual. If everyone at work decides to eat out, you could either eat your own food by staying back or simply order the cheapest option on the menu.

2) Saving Money on Commuting

Do you cringe at the price of filling up your gas tank? Consider cutting your fuel costs and saving wear and tear on your car by changing your commute. See if you can:

  • Search for an alternative route.
  • Avoid rush hours. Go to work half an hour earlier and leave an hour later.
  • Carpool with a co-worker or someone who works nearby.
  • Take a bus. You may enjoy the time usually used in driving to read or listen to translation of the Quran on your mobile.
  • Get your chores done along the way. Pick up grocery items or laundry, while you are coming back from work. This can save you time, money and fuel.

Save Money on Gifts

Have you ever had to give gifts to co-workers, because they’ve just got married or someone has just had a baby? Most organizations have a policy, where you can give a gift to colleagues or customers financed by the department budget. Find out if your organization has such a policy and utilize it, thereby saving your personal income.

Another way to save on gifts is to pass on gifts that you have received from others or be a little creative and design a card or clothes or even bake a cake. You can also pick a bunch of flowers from your garden. In fact, there are endless options of saving money on gifts – all it takes is some creativity and a willingness to pinch Paisas!

How to Make Less Last Longer

Vol 6 - Issue 4 Hpw to make less last longer

How does less become more? Look around your house. Have you forgotten grandma’s advice to reuse plastic bags, turn over shampoo bottles to use every last drop of shampoo, or remove the beautiful lace border from an old dress to be reused on a new one? The pace at which we have all adopted the spending philosophy has got us into the global financial mess that we now have to bear the burden of. In Pakistan, too, the frenzy of consumerism has left its dark mark. Class chasms have widened and the crime rate has shot up. To add to this, inflation, redundancy and falling incomes have left us high and dry.

So how exactly do people make less last longer? Aimen, a young wife, is very careful about spending money. Before spending on any item, she asks herself, whether she can live without it or not. Sometimes, she delays buying an item for two to three days just to find out, whether it’s really necessary. Her strategy works, because curtailing spending lets her save more in her current account at the bank.

Arifa, a grandmother from a middle class background, uses small pieces of cloth left over from stitched clothes to sew small clothes for her grandchildren. This allows her to use the cloth which would have otherwise gone to waste. It also lets her save money that would have been spent on children’s clothes, which they would soon outgrow.

In many families, elder children’s clothes and shoes are handed over to the younger ones. I know of a family where the older sister, who is married and whose husband likes her to wear new clothes frequently, gives away her old clothes to her sisters. The sisters then get the clothes altered and reuse them.

Planning and household budgeting also makes less money last longer. Dividing up the household income into different categories of expenditure and sticking to that right through the month also helps in curtailing expenses and increasing savings. Rahat, a teacher at a training institute, says that shopping from supermarkets where items can be bought in bulk for the entire month, goes a long way in reducing household expenses. The trip to the supermarket can also be turned into a less expensive family outing. Shopping at the local flea market, where items can be bought at a bargain, can also help to control the household bill.

Seeing our savings grow is sometimes difficult, because most women do not have the knowledge of or access to Halal investment options. Savings are usually invested in the so-called committees, where the accumulated pool of savings circulates amongst the participants of the committee. Undoubtedly, savings in committees do come to good use as Nazia, a home tutor, tells us. Recently, she used her savings pool to buy necessary items for her sister’s wedding. Women with greater access and knowledge save in a current account at the bank. Some go further and invest in a mutual fund, where they can actually see their money grow.

To find out more about Halal options for investment, spending, money saving tips and the best way to plan and make the household budget, read our upcoming articles. I pray that in these household tips you would find the secret formula that will help you to make less last longer.

To protect the privacy of the individuals mentioned in this article, their names have been changed.