Budgeting: A Path to Financial Freedom

Living in the US, a consumption society, can be very expensive. The daily expenses (taxes, accommodation, utilities and many more) could put a lot of stress on your finances. As a result, we may find ourselves living paycheck-to-paycheck, with little to no money left to save. Many African immigrants and students in the US are no exception to this lifestyle. If caution isn’t taken, one can end up racking up a lot of credit card debts, or being bankrupt while in the land of plenty.

Americans on a whole just aren’t great savers, to the point that almost 70% of them don’t even have $1,000 in the bank. Furthermore, almost half of Americans claim that to cover a $400 emergency, they’d need to borrow the money or sell something quickly to round up the cash. African immigrants in the US are experiencing the same financial struggles.

According to a recent study by a pool of U.S. Banks, only 41% of Americans use a budget even though it’s one of the most effective ways to keep track of our finances. This data is only a slight improvement over a 2013 poll, which showed that just 32% of U.S. households maintain budgets.

 

WHY SHOULD YOU BUDGET?

You may be wondering why you need a budget. Budgeting should be viewed as a means to an end. Budgeting and money management are a way to allow us to spend and save our money in the most productive and efficient way possible. Keeping tabs of our spending can be a very challenging task, especially if we’re living reasonably, but not aggressively, below our means. Think about all your monthly expenses. There’s housing, transportation, health care, utilities, entertainment, and food — and those are just the big ones. Some of us have several dozen spending categories to account for each month, from gym memberships to magazine subscriptions, and even those smaller expenses can really add up.

That’s why having a budget is crucial. Without one, you won’t know how much you’re spending, and you’ll have an even tougher time identifying opportunities to cut back. On the other hand, if you list all of your expenses out line by line and total them up, the numbers won’t lie. You’ll see exactly where your money is going, and from there, you can find ways to free up cash to increase your savings.

 

GETTING STARTED WITH BUDGETING

While the idea of creating a budget may seem daunting, its actually the ideal thing to do. But before you create that budget, there are a few things that you should do which would help you budget properly.

Gather Your Expenses

The first step to creating your budget is to first know what you monthly billing is. This ranges from your rent or mortgage, utilities, credit card, cable, internet etc. Also, any bill that you pay less on should be noted like grocery shopping and since your monthly bill is not fixed, reviewing your account statement would also help you in knowing what you spend on.

Determine Your Monthly Income

Knowing your monthly income should be far easier than gathering your expenses. Your bank statement should tell you all you need to know about this and if you receive any other monthly payment, be sure to take note of this.

Create Your Monthly Expenditure

Creating a monthly expenditure with all the information you got from gathering your expenses would be easy. List out the most important and necessary things like rent or mortgage, credit card etc. and make them your priority expenses. Also, remember to create an irregular expenditure as monthly expenditure is not mostly fixed to a certain amount. Irregular expenditure may include car repair and insurance.

Subtract Expenses from Income

Subtracting you expenses from your income is the final step to budgeting as it would tell you how what steps to take if your living expenses is more than your income or if your income is more. After subtracting your monthly expenses from your monthly income and you have left overs, this can be used as savings or in investment to help increase your income but if you have a negative result, it is advised that you reduce your monthly expenses or increase your income.

 

WHAT BUDGETING DOES FOR YOU?

Living without a budget is like traveling across country without a road map. Although both can be achieved, the result is usually expensive and wasteful. Hence a budget is meant to prepare you and help you curb those wastes.

A budget acts as a road map

A budget will reveal where every dollar is currently being spent. The visual representation of the actual expenditures reveals the direction followed. When the course being followed is incorrect, the budget can be used to re-route your plan. The budget is a living document that must be updated with the changes that occur in your life.

Revels Waste

A detailed budget that is compared against the actual monthly expenditures will reveal the incorrect use of money. When money is spent on non-budgeted items, budget shortfalls are created and can be corrected. When you can identify a source of waste you can then take corrective action.

Helps in Building New Habits

Efforts to stay within the budget will build new spending habits that can be maintained over time. Working within the budget will shift actual expenses from unnecessary categories into the most essential household categories. Money will be available for the most important expenses and debt reduction becomes possible.

Controls Spending

If expenditures exceed budgeted amounts, corrections can be made in the coming months to control the monthly flow of money. When outstanding debt is weighing on the monthly finances, the budget can show areas where spending can be reduced to find the money to repay the debt.

Grows Savings

Budgeting activities make money available to save some of the monthly income for various reasons. Short- and long-term goals can be reached through savings efforts that seemed impossible just months before a budget was created. Savings becomes the highest priority and money can be saved ahead of paying the bills since every expense is closely monitored and compared to the budget.

It’s important to note that to compliment the expensive American lifestyle, budgeting should be a tool in the hands of every African immigrant in the United States.

 

7 PRACTICAL TIPS FOR EFFECTIVE AND HASSLE-FREE BUDGETING

  1. Understand why are you budgeting

Budgeting without purpose is a waste of time. There are several important reasons to budget, but keep in mind that everybody’s financial circumstances are different. Some may budget to make sure they can pay all of their bills. Others budget to make sure they have extra money to fund retirement or pay down debt. Identify why you are budgeting.

  1. Budget is only meaningful…if you execute

How many times people set up a budget in their favorite budgeting tool and then completely forget about it? Many times setting up the budget makes us feel like we are doing the right thing, but it doesn’t have any meaningful effect on how we spend our money. We need to execute on the plan

  1. Save First then spend

A very effective budgeting strategy is to set aside savings as soon as you get paid. By doing so, you avoid the temptation to spend that money later in the month. You also aren’t fooled into thinking you have more money available to spend than you really do. The pay yourself first strategy can also be used to tackle debt. If you plan to have extra money to put toward credit card debt, for example, don’t let that money sit in your checking account until your payment is due. Make the payment immediately.

  1. Monthly budgeting for periodic expenses

There are a lot of expenses in most budgets that aren’t monthly. In addition to car insurance there’s life insurance, vacations, gifts, property tax, and estimated taxes for some. The way to handle periodic expenses is simple. Add up the annual cost for all of your periodic expenses. Then divide by 12 and set this amount aside each and every month.

  1. Anticipate the unexpected

There are some expenses you know are coming, but you don’t know when or how much. Home and car repairs are a perfect example. With enough experience, you’ll be able to make reasonable estimates for these expenses. And even if you come up short, at least you’ll have some of the cash you’ll need to handle these unexpected costs.

  1. Do not forget the big expenses

Budgets often neglect the big purchases, like a car, that we know will eventually hit us. Even if it’s years away, setting aside just a little bit of money each month now will enable you to pay cash when the day comes.

  1. Narrow down your budget categories to 3

Many people avoid budgets for one reason–the thought of tracking every dime they spend is just unbearable. If that’s you there is a simple solution–don’t. For many, there is no need to track every category of spending. Remember to think back on why you are budgeting in the first place. If it’s to control your spending, figure out what spending areas cause you the most trouble. If you are like most, you can probably narrow it down to 3 categories or fewer. Then just track those 3 categories of spending.

 

Source: Financial Advisor Rob Berger

 

Afrikagora Magazine

 

 

 

 

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