What is a Budget? – Part Two


A budget is a plan for managing your cash flow and is used to estimate your future income and expenses. To put it simply, a budget lists all your expected cash inflows and outflows to assist you in making prudent financial decisions.

Why do I need a budget?
How many times have you made ATM withdrawals only to realise that you have spent all your money within a couple of days? Often it becomes extremely difficult to remember where that money was spent. A lot of people do not keep track of their finances and end up spending more than they mean to. This is why having a budget is important.

Benefits of having a budget
• Live within your means
• Cultivate a savings habit
• Save for financial emergencies
• Enhance your net worth

Live within your means

Needs and wants

Remember that your budget is based on your income and expenses. As each person’s income and expenses differ, your budget should be based on your needs and wants.

How do you then differentiate between a need and a want?
A need is something you must have and can’t do without, while a want is something you would like to have, which is not absolutely necessary.

As time evolves, your basic needs may extend to more than just food, shelter and clothing. Your want today, may become a need tomorrow.
Take this example. An individual 20 years ago did not view a mobile phone as a need. But in today’s modern world, a mobile phone is considered a necessity which makes it a need instead of a want. However, when you choose a mobile phone that is expensive and has all the latest features, you are shifting this need into a want.
The decision you make with regards to what you need or want will directly affect your spending.

Delay Purchases
Whenever you intend to make a purchase, especially when it is a want item, take time to think whether it is within your budget.

Living within your means require you to learn how to say no to unnecessary spending. Look into substitutes for your needs and wants especially if it does not fit your budget.

Ask yourself these questions before you spend:
• Instead of buying a car, why not use public transportation?
• If you really need a car, can you consider getting a second-hand one?
• If you need a mobile phone or a computer, will a basic model serve your purpose?
• If you want branded clothing, can you substitute for reasonably priced and good quality clothing instead?

A budget needs to be realistic and tailored to meet your earning capacity and spending needs. Living on a budget does not mean sacrificing all your luxuries. It simply means that you will have to plan and at times, change your perception and spending habits.
Spending wisely

The key to a successful budget is to spend less than what you earn. When you have the urge to buy something, pause and ask yourself the following questions:
• Can I afford to buy it?
• Do I really need it?
• Is there something cheaper?
• Can I delay buying it?