Adedamola Adeniran

Adedamola is a First Class Communications and Multimedia graduate from the American University of Nigeria. She is an entrepreneur who has worked with non-governmental organisations and research firms on different projects. She loves to share ideas on wealth management and investment opportunities.

Three budget plans that don’t feel like a jail-term for your wallet

“The budget is not just a collection of numbers, but an expression of our values and aspiration.”
— Jacob Lew

Perhaps, the lyrics “money slow to enter, money quick to go” made famous by Nigerian rapper M.I., aptly describes our relationship with money. Still, some of us can’t even fathom why it’s imperative to create a budget. Interestingly, there are certain misconceptions associated with budgeting.

One school of thought thinks the word ‘budget’ can be interchanged with ‘deprivation’, ‘restriction’, or ‘obstruction’- basically any word that fits in perfectly as an antonym of ‘freedom’. You’re not going to stick to it, so why waste your precious free time. The other school of thought perceives the act of budgeting as a time-consuming activity that involves writing detailed line items of monthly expenses on a spreadsheet. In other words, the daunting nature of the task equates to pulling out teeth.

Budgets are not only for the rich, or people who earn well enough to have extra money in their account. In fact, it is much more rewarding to pay attention to your finances when you have little to spare. Regardless of how lazy or busy you are, there are flexible, easy and effective strategies to improve your financial standing.

Let’s say I’m willing to give budgeting a try. Why should I take the time to get it done?

Since a budget is a written financial plan of how you intend to spend your money (so you stop wondering how it disappeared), you can make financial decisions ahead of time. By tracking expenses, you can evaluate if your spending matches your priorities. All those clothes, shoes and bags are amazing, but if you come close to having a stroke when it’s time to pay the rent, you need to reorganize your finances.

Most budgets require you to list out your expenses, group them into different categories and assign a figure that represents the limit to spend in each category, based on your income.

So how do I know the limit to assign to each category? Is there a rule of thumb?

The following financial plans can be customized to take you a step closer to building wealth:

The Anti-budget Plan

If you’re absolutely against budgeting or just too busy to find the time, consider trying the 80/20 budget plan. There are two categories under this plan- savings and expenses. All you have to do is assign 20 percent of your income to savings, retirement and debt repayment, while 80 percent is spent on everything else.

Isn’t this a lethargic way to approach your finances? Can this financial plan help you build wealth?

While you may not be rigorously tracking your expenses, the plan emphasizes the need to ‘pay yourself first’. It would be an absolute disservice to yourself to regularly pay bills but forget to set aside money for an emergency fund, retirement, investment opportunities and debt repayment.

You work hard every month, so an improvement in your finances is an appropriate reflection of your diligence.

The 50/30/20 Budget Plan

This financial plan was proposed by Harvard Economist Elizabeth Warren and her daughter Amelia Warren. The duo suggests you track your expenses through three categories — necessities, discretionary items, and savings/debt repayment.

First, 50 percent of your income after taxes should go towards necessities such as food, housing, utilities, transportation, and so on.

Next, 30 percent should go to ‘discretionary items’, which is just a fancy term to describe your wants. Examples include movies, restaurant bills, purchase of internet data plans, and so on.

Finally, 20 percent is assigned to building an emergency fund, saving for retirement and paying off debts.

What’s special about this plan?

If you’re new to budgeting, it’s an easy plan to help track your expenses, build a habit of saving, get out of debt and even plan for retirement. Stay on track and over time, you will get to your desired level of financial stability.

The 5-Category Budget

If you don’t want a budget plan as broad as the 80/20 plan or the 50/30/20 plan but can’t imagine yourself creating a detailed line item budget, try the 5-category budget. This plan can be seen as ‘the golden mean’– a concept Aristotle described as the desirable medium between two extremes.

As implied, under this plan there are five categories — housing, transportation, other living expenses, savings and debt repayment.

The plan states housing-related expenses should take 35 percent of your income. This includes rent, mortgages, house repairs, utilities, property taxes, and home insurance.

The next step is to set aside 15 percent of your income for transportation. This includes car payments, insurance, fuel, car repairs and servicing, public transportation costs, toll, and so on.

Under the plan, other living expenses or discretionary items should take up 25 percent of your income. This is a great place to add vacations, movies, concert tickets, clothes, and so on.

Savings, which is the fourth category of the budget plan, should consume 10 percent of your income. This includes savings for retirement and building an emergency fund.

Finally, 15 percent of your income should be used for debt repayments. This portion should go towards paying off bank loans, money you owe friends as well as vendors. If debt repayments don’t apply to you, consider assigning more funds to your savings.

There you have it; three flexible and effective strategies to ensure you prioritize your spending. These plans will ensure you cope with unexpected expenses and clean up your finances.