Hopeton Morrison, ContributorRECENTLY, WE addressed the matter of persons creating wealth on limited resources. This week, we look at part two. Budgeting is the most fundamental tool to prudent personal financial management and wealth creation. And it is just as important to the high-income earner as it is to those on limited income.
A budget is simply a plan for investing and spending money. It serves a number of key purposes. Firstly, it allows us to save and invest for future goals, while taking care of present ones. Secondly, it serves a crucial cash flow management purpose in that in the process of managing your cash, you ensure that the timing of income and expenditure is consistent.
There are some persons who never budget. They argue that it is pointless as their earnings are so small that serious budgeting is not only unnecessary but inconsequential. Some go further to argue that whatever goes on paper could just as well be kept in their memory. And in fact they do a far better job of managing their money anyway by thinking about it constantly.
NO SUBSTITUTE
If you have never prepared a budget, you are denying yourself a major tool for prudent personal financial management and wealth creation. Regardless of how much you rate your memory, there is absolutely no substitute to sitting down with pen and paper, or better yet, with a computer to plan your financial roadmap for a particular period. Most persons plan on a monthly basis, but if you are paid fortnightly or weekly, there is absolutely nothing wrong with doing 26, or for that matter 52 budgets in a calendar year.
On the face of it, all this time spent to plan how to invest and spend (the ordering of both activities is deliberately done) your money does seem to take up an awful lot of valuable time. That is precisely the point. Prudence in personal financial planning does require time and effort. The wealthiest persons spend an average of five hours per week doing just that.
A good budget anticipates irregular expenditures and allows us to adjust by taking a number of steps. First, we can postpone additional expenditures. Second, we can source outstanding income sooner. And third, we can source credit to tide us over that initial burst of expenditure.
Importantly, a budget is also a critical control tool as you are measuring actual performance against planned performance. If you budget monthly, your analysis will show up areas of weaknesses that need immediate attention, other opportunities for saving of which you were previously unaware, and even cases of unrealistic planning.
Many persons, however, take up budgeting because they are forced to, due to several life-changing events. Some persons are often surprised that the three most significant life events are not death, divorce and sickness, but the rather more mundane events of the birth of a child, moving to a new home and planning for retirement.
Make sure that all members of your household are involved in the budgeting process, also especially the children. If you can get them to buy into the challenges you face to make ends meet, you are way ahead of many parents who face often irrational demands from their children.
Once you have worked out your budget, if your income cannot match your expenditures, your options are very simple. You can cut expenses until they match, delay expenditures for another month or more, or borrow to meet your shortfall.
Finally, it is recommended that households plan as one. It is commonplace these days for partners in a relationship to maintain separate accounts and oftentimes these are kept secret from the other partner.
Usually the rationale is that persons are protecting themselves in case there is a break-up. Ever heard of the self-fulfilling prophecy? And counsellors do tell us that the primary cause of breakdown in relationships is problems with finances.
Hopeton Morrison is general manager of St. Thomas Cooperative Credit Union Ltd. and lecturer in the School of Business Administration at the University of Technology. Please send comments and questions to: hmorrison@stccu.com.
