Mastering the Art of Budgeting and Investing
— Your preferred budgeting method is very closely related to the amount you are able/willing to allocate to your investment endeavors and how often you invest.
Unpopular opinion: Budgets have been saving lives since...forever.
An introduction to budgeting often starts with learning about opportunity costs - prioritizing your needs in order of urgency – and gradually evolves into calculating how best to spread your income, within a time period. A budget is as important to individuals as it is to companies or any entity that has financial responsibility.
Essentially, budgeting is a method by which you determine how best to spread your available income to adequately cover your lifestyle needs/expenses.
Your preferred budgeting method is very closely related to the amount you are able/willing to allocate to your investment endeavors and how often you invest. Continue reading to learn about all the ways your budget is important for your investment:
- If you subscribe to the ‘cut your coat according to your size’ school of thought, then budgeting is one of the best ways to manage your finances. There seemingly is never enough money to adequately satisfy wants and needs; hence, a budget is like a pizza that is sliced to ‘feed’ – to satisfaction or to a certain extent - the different aspects of an individual’s life that require funding. To maximize your investments, from diversifying your portfolio to growing your returns, you would ideally want to allocate a certain amount of capital, on a weekly, monthly or yearly basis, to your investments.
- How many times have you complained about being broke and being unable to explain where the money went? Indeed, money can be quite elusive, here one minute and gone the next. But the key advantage of a budget is that it puts you in control of your money by ensuring that your money goes to the important areas you want it to and not impulsive or unplanned expenses.
- Often included in a budget are specific wants or needs that we wish to achieve, immediately or over a time period. Housing, cars, devices or a higher class of investment an individual might be aiming for, can be included in a budget. A budget serves the dual purpose of highlighting those expenses that can be cut and puts focus on those expenses which we would rather spend on or will yield better future returns.
If you are starting out or looking for a better way to make the most of your income, below are some budgeting methods you can use for effective use of your income:
This budgeting method was first adopted in the 1970s, which involves starting the budget on a blank or ‘zero’ basis and building up based on the individual or company’s income. For personal financial goals, the individual with a set income divvies up their income to satisfy wants, needs and savings until there is 0 naira left of the income.
*INCOME – EXPENSES = 0.
This method specifically prioritizes savings/investment over spending. Upon receiving income, a percentage is immediately put aside for savings or investments for future yield. Whatever is left is then used at the individual’s discretion, to satisfy other financial responsibilities.
With this style, the individual is in control of determining how much they want to allocate to their investment goals.
Envelope System Budget
This is considered to be an uncomplicated budgeting style. The key feature of this style is that the individual calculates a monthly estimate for each expense category and assigns envelopes, marked by the categories. For instance, if your monthly expense on entertainment is N50,000, your envelope will be labelled “Entertainment - N50,000’. Each withdrawal from the envelope will be noted down to keep track of expenses.
This is a popular method which involves splitting your income into 3 major categories: 50% to needs, 30% to wants and 20% to savings. The ‘needs’ category includes things that are necessary for the individual’s living and lifestyle, like food, rent, transportation, clothing and more. The ‘wants’ category includes those things which the individual would like to have and the ‘savings’ category are allocated to savings, investments and emergency funds.
In using this style, the amount to be allocated to savings and investments is fixed at 20%, distributed at the individual’s discretion. There are also variations to this style, such as the 70/20/10 (split between living expenses/debt repayment/entertainment) or the 80/20 rule (split between needs and wants/savings).
The ‘No’ Budget
You are probably thinking this method is about saying ‘no’ to debit alerts. Unfortunately, debit alerts are here to stay...sorry.
The ‘no’ budget is suited for individuals who don’t especially like the limitations of budgeting. The key things which the ‘no-budgeter’ keeps track of are: 1) how much they make and, 2) ensuring that all their expenses are covered. However, this budgeting style works better for people who make far more money than they spend; for instance, if your monthly expenses are 20 – 50% lower than your income, then this method can work for you.
One of the key benefits of these styles is how much control the investor has over spending, saving and investing. Also, at the heart of these methods is the need for discipline and focus on financial goals.
So, which of these budgeting styles do you think fits your spending habits best? Click here to take a look at the affordable, variety of financial instruments available at your fingertips, with GDL.