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:
- 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.
- 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.”
- 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.
- 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.
- 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
http://www.vertex42.com
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