A Budget is the most basic and important factor in helping an individual achieving financial success.

How to Budget Effectively?

It helps him to make the best use of the money he earns; to meet the financial needs of today and goals of tomorrow.

It also allows him to manage his cashflows effectively while focusing on his long term financial goals..

How to Budget?

There are many budgeting tools like an excel template, mobile applications and Desktop applications, which can help in setting up a personal budget and track expenses regularly.

The following are some of the excel tempaltes available free to download and create a personal budget;

The following are some of the mobile and web based applications, which can help in creating a budget and tracking expenses.

Once you have decided which method to use, either a mobile application or an excel sheet, or budget using a simple paper and pen, the following steps will help you create your budget…

Step 1 – Pay your self first  The biggest mistake most of us do, is that we pay bills, expenses, loans and everything else before we pay ourselves. When all bills and expenses are paid, there is very little or nothing left to pay ourselves.

John earns

AED50,000/Month
  • and pays the following expenses;

  • Rent – AED 15,000
  • Schooling –  AED 10,000
  • Utilities  – AED 5,000
  • Personal Loan  – AED 5,000
  • Car Loan – AED 3,000
  • Credit Card  – AED 6,000
  • Groceries –  AED 4,000
  • Miscellaneous  – AED 2,000

Smith earns

AED 30,000/month
  • and pays the following expenses;

  • Rent – AED 10,000
  • Schooling –  AED 6,000
  • Utilities  – AED 2,000
  • Personal Loan  – AED 3,000
  • Car Loan – AED 2,000
  • Credit Card  – AED 3,000
  • Groceries –  AED 3,000
  • Miscellaneous  – AED 1,000

Harry earns

AED20,000/Month
  • and pays the following expenses;

  • Retirement Savings : AED 2,000
  • Rent – AED 5,000
  • Schooling –  AED 5,000
  • Utilities  – AED 2,000
  • Car Loan – AED 1,200
  • Groceries –  AED 2,800
  • Charity – AED 200
  • Miscellaneous  – AED 1,800

Who’s you think is rich? John, Smith or Harry?

Harry is most likely to lead a happy and fulfilled life while being able to save for his retirement, and also for charity from his income, thanks to a robust budget he follows..

The most common advice shared in almost all financial self help books, like Rich Dad Poor Dad & The Richest Man in Babylon  is to pay ourselves first.

George Clason states that this is cure for lean purse….

Determine a certain percentage of your income ( 10% of your income is highly recommended) and setup an auto debit into a savings plan for your retirement.

I know that you are possibly thinking it is impossible to set aside 10% of your income, given your current state of affairs..

Don’t be disheartened, start with a 10% provision, we are still in the planning stage, and you can always comeback to firm the percentages before your fix your budget…

Step 2 – Determine your monthly income

When I say, monthly income, add only the regular and recurring income.

Only include actual income, do not consider income you are likely to receive or notional income.

For best results, add your last 12 months actual income from your bank account and take the average figure as your planned income.

Step 3 – Ascertain fixed expenses

Fixed expenses are the ones which are regular and do not change in small intervals..

They are also usually the basic expenses like; Rent, School Fees, School transportation, Maid salary, Elife – Internet and TV bill, gym or club membership etc…

Step 4 – Ascertain Variable expenses

Expenses which are likely to change according to usage and other factors are called variable expenses..

Examples of variable expenses are; Food, Groceries, Utilities, Departmental, Personal Care, Laundry, Car fuel, repairs and maintenance etc…

Step 5 – List and organise debt….

Make a list of all the debts like credit card(s), personal loan, car loan, mortgage, student loan and hand loans…

Organise the list in the order of highest interest to lowest interest…

For example : Credit cards always come first, as they are likely to charge the highest interest, followed by personal loan, mortgage, car loan and other loans…

Step 6 – List your Savings

Savings can be for short term or long term financial needs..

Short term needs could be an annual vacation, purchase of gadgets, saving for buying jewellery or buying a car..

Long term needs could be, saving for buying a property, saving for children’s education or for retirement…

Step 7 – Don’t forget Charity

Allocate at-least 1.00% of your income to your favourite charity.

When you give without remorse, it creates a feeling of fulfilment, which is essential to lead a happy life..

Step 8 – Balance Your Budget

An ideal budget should have the following ratios

%

Pay Yourself

%

Short Term Savings

%

Bills, Expenses and Charity

%

Loan repayments

If your income is more than your expenses, then you are very fortunate and it would be very easy for you to create and maintain a budget.

If your expenses and loan repayments are more than 80% of your earnings, then you have a serious cost cutting exercise to undertake.

Revisit all your expenses, involve your family members and identify expenses, which can be avoided or trimmed

Consider debt consolidation to make the repayments more affordable.

Banks like ADIB and NBAD and Mashreq are offering debt consolidation loans to residents of UAE to help them better manage cashflows and save on interest costs..

You can also consider refinancing your mortgage, to take advantage of the low rates currently prevailing.

Also check if you can get a lower premium for your mortgage insurance and property insurance, because banks usually charge a fixed percentage of premium, irrespective of the fact if your are a smoker, non smoker, healthy, unhealthy, young or old….

Talk to an independent financial adviser to ascertain how much premium you will have to pay to protect your mortgage, if the premiums are lower than what you are currently paying, consider switching…

Try and reduce 5% to 10% on all variable expenses like groceries, eating out, departmental, clothing, utilities and car expenses. There is always scope to reduce these expenses..

The following flowchart will explain the process;

How to Budget

If your expenses are less than or equal to 80% of your income, fix your budget, to start implementing from the being of each month.

In the next post we will discuss about how to track expenses and re work the budget from the second month onwards

To know more about budgeting, saving, investing or protecting income and wealth, call me on 050-2285405 or

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