It is very hard to find anyone who thinks their salary is enough. But it is possible to live within your pay. Here is how.
First pay for essentials such as food, rent and clothing, then set aside a fixed amount of money each month for savings and investments, also, avoid taking loans for wants that can be foregone.
These are just some of the key budgeting tips that you need to fit your monthly spending needs within your income, especially at a time when the cost of living is fast rising amid a growing tax burden even as earnings stagnate or fall due to Covid-19 related effects.
Data from the Kenya National Bureau of Statistics shows that inflation rose to 6.32 per cent in June, the highest level in 16 months on higher cost of basic commodities, underlining the need for households to prudently budget with their precious earnings.
For instance, within the past year alone, the cost of food and non-alcoholic beverages has jumped up by 8.46 percent, while the housing basket, which includes water, electricity, gas and other fuels, has increased by 4.25 per cent.
Realistic household budget
Meanwhile, the cost of transport has risen by 14.71 per cent due to an increase in fuel prices by more than 40 per cent. As a result, adequately fulfilling these needs requires establishing a realistic household budget that you will need to stick to, to avoid spending more than you earn, advises Stanley Kisaka, an economist.
To draw a realistic household budget, Mr Kisaka says, plan with your net income after remitting your tax obligations.
The economist notes that it is easier to prepare a budget if you are a formal employee with a fixed income, but advises that if your income fluctuates each month, then divide your annual earnings by 12 to give you a stable monthly estimate that you can budget with.
“Once you know how much money you net in a month, the next step should be to put together a list of your monthly expenses. This would include food, household utilities such as electricity, water and gas, rent and loan obligations,” says the expert.
Once you have compiled a list of your monthly expenses, the next step, he says, should be to identify which of your expenses are essential and which are non-essential.
This categorisation will enable you set aside enough money to clear bills for essentials such as food, rent or maintenance (for those living in their own homes), utilities, transportation, insurance, and debt repayment. Once the essentials are well catered for, Kisaka says, you can now set aside some money for non-essentials such as your gym membership and entertainment.
“With prices of commodities fluctuating month to month due to the rising levels of inflation, you may need to do a monthly average by dividing expenditure on around four consecutive months, in which case it would be best to set the average price on the higher side.”
He also says that ideally, 50 per cent of your income should go to essentials, 20 percent towards savings and investments and 30 percent can be used for non-essentials such as entertainment, which, while it can be foregone in cost-cutting measures, they are important for your wellbeing.
Be honest with yourself
However, the economist admits that while people live under different circumstances and the 50-30-20 budget rule can help one meet their financial goals easily, it is important to be honest with yourself and plan for your money guided by the kind of life you would want to live.
Meanwhile, he adds, it is also important to track how much you spend on each expense, whether fixed or variable, per month.
This, he says, can be done by accessing your bank or M-Pesa statements via your mobile phone if you are accustomed to cashless transactions, or by calculating manually if you use cash often.
Once that is done, Kisaka adds, you should compare how much money you are making in a month with how much you are spending. If you notice that your expenses are higher than your income, you will need to make adjustments to the amount of money you spend to avoid debt.
“If money is tight, you might not be able to adjust fixed costs such as housing because maybe you like that particular house for security, size or convenience reasons, however, you can scale down on variable costs such as outings, luxury or your gym membership,” he adds.
Boost your revenue
While reigning in on your expenses, the economist says it is also advisable to boost your revenue by generating other sources of income, which would help you achieve the lifestyle you desire, or at the very least, come in handy in case of emergencies.
If your income surpasses what you need to meet your expenses, he adds, it is important to invest the extra money in items of value.
“Look long-term and plan into the future. Use the extra money to invest in yourself by, for example, signing up for classes which could help boost your skillset to make you more marketable. Or save the money so that you can be able to take your children to certain schools in future,” he notes.
Michael Thotho, a project manager with personal finance expertise firm Centonomy, echoes Kisaka’s advice, saying that tracking your spending is key in cultivating discipline to stick to your budget plan.
“Once you have set up your budget, it is crucial that you stick to it by being self-disciplined. This could mean delaying gratification or if you know for sure that you are not very accountable with your spending, you could download a budgeting app which will help you track your expenses and notify you in case you are about to surpass your spending limit,” Thotho said.