How To Create a Personal Budget in 6 Steps

Have you ever wondered where all your money went at the end of the month? You’re not alone. Many of us have been there, feeling like we’re just one unexpected expense away from a financial disaster. But it doesn’t have to be this way. 

With a little planning and discipline, you can take control of your finances and start working towards your financial goals. This is where budgeting comes in.

Managing money can be challenging, especially in a country like Nigeria, where the cost of living and the economy are often volatile. 

I remember when I first started working in Lagos, the financial capital of Nigeria. The city was bustling, vibrant, and full of opportunities but also expensive. I lived paycheck to paycheck, with little left for savings or investments.

When I started tracking my income and expenses, I began to see where my money was going. 

I realized that I was spending a significant portion of my income on rent and transportation, leaving me with little to save or invest. 

This was a wake-up call. I knew I had to make a change.

What Is Budgeting and Why Does It Matter?

Personal budgeting is an essential skill that allows you to take control of your finances, plan for the future, and work towards achieving your financial goals. 

While it may seem daunting at first, budgeting simply involves tracking your income and expenses so you can make informed decisions about spending and saving. 

With some time and effort spent upfront to understand your finances, you can create a realistic budget that puts you firmly on the path toward financial security.

Budgeting is important for several reasons:

1. Gain Control of Your Finances

Creating a budget lets you see exactly where your money goes each month. By tracking all your expenses, you can identify areas to cut back. 

For example, I realized I was spending a lot on transportation because I lived far from my workplace. Let’s not talk about eating out; it was like a cancer to my finances. Fortunately, by moving closer to work, I significantly reduced this expense.

2. Achieve Financial Goals   

With a budget, you can plan for important financial priorities. 

For instance, one of my goals was to save enough money to start a small business. By cutting back on unnecessary expenses and setting aside a portion of my income each month, I achieved this goal within a few years.

3.  Prepare for Unexpected Expenses   

Even the most carefully crafted budgets can be thrown off by unexpected expenses. Budgeting helps you prepare for these by setting aside savings each month. 

An emergency fund is crucial in Nigeria, where medical emergencies can quickly drain your savings.

Steps to Start Budgeting

Here are the key steps to start controlling your finances through budgeting:

1: Track Your Income

Add up all sources of income you receive each month after taxes. This may include your salary, freelance work, or other earnings. 

In Nigeria, many people have multiple streams of income, so it’s important to account for all of them.

2: Record Your Expenses

Track every naira you spend for a month. Categorize expenses as essentials like housing, utilities, groceries, and transportation, or non-essentials like dining out, entertainment, and vacations.  

3: Analyze Spending Habits

Look for spending patterns in your expenses. Identify where you may be overspending so you can cut back. 

For example, I noticed that I was spending a lot on eating out. By cooking more at home, I was able to save a significant amount each month.

4: Set Financial Goals

Decide on short and long-term financial goals. Be specific about what you want to save for and how much it will cost. 

Common goals are saving for a new car, starting a business, or buying a house.   

5: Make a Personal Budget

Craft a monthly budget that allocates money to fixed expenses, financial goals, and discretionary spending based on your income and spending analysis.

6: Revisit and Revise

Evaluate your budget monthly and make changes if needed. Revise goals if not realistic or cut expenses if you did not meet savings targets.

Tips for Sticking to Your Budget

Creating a budget is only the first step. The real challenge is having the discipline to follow your plan. Here are some tips:

  • Involve family: Discuss with family to ensure everyone understands the budgeting priorities and spending tradeoffs required.
  • Build in flexibility: Allow some wiggle room in your budget for unexpected expenses. Cut back in other areas to compensate if needed.
  • Save automatically: Set up automatic monthly transfers into your savings accounts to stay on track.
  • Review frequently: Monitor your budget weekly or monthly and make changes immediately if you are off track.

Personal budgeting does require some initial work, but once you have created a plan that aligns with your financial values and goals, it only takes about 20-30 minutes per month to maintain. And, budgeting pays huge dividends in the long run by allowing you to take control of your finances, reduce stress about money, save for the future, and achieve your most important financial goals.

So take charge of your money situation today by following the budgeting basics outlined here. You will be surprised how empowering it feels to have a clear view and control over your finances!

What is the personal budget?

A personal budget is a finance plan which allocates future income towards expenses, savings and debt repayment. Personal budgeting requires both creating a doable plan and following it.