Personal Budget


What is Budget and Budget Plans?

Budgeting is part of strategic planning and it is a major part of personal strategic or life planning. To appreciate a personal life budget and its purpose, it is necessary to understand budgeting in general. A budget is a table of expected revenue and expenses representing actions to be carried out in a given period like one to three years to achieve desired goals. Before embarking on a business, it is advisable to have a budget looking ahead one to three years. Activities to be budgeted for are derived directly from the strategic planning process and the budgeting process seeks to finance the selected strategies (ideas) in the strategic plan.

A budget is part of the strategic planning process and usually comes at the tail end of the process to allocate funds to any activity in the plan that needs funding. It is prepared at the start of new business as well as at the beginning of each year for an ongoing business. A budget may also be prepared at the initial researching stage to determine the viability of the business idea.

A budget has only two main projections, income and expenditure. Expenditure is usually in two parts namely recurrent or operating expenditure (OPEX) and capital expenditure (CAPEX). The difference between revenue and expenses is profit or loss. It is useful to prepare a CAPEX budget as well. OPEX is operating expenses while CAPEX is capital expenditure. CAPEX is expenditure for acquisition of one-off durable assets that will be used in the business for more than one year.

Purpose of a Budget

A budget is used to allocate funds to prioritized activities, to see in advance whether there is a return or not if planned activities are implemented as planned, and to monitor and control spending through analysis of variances between budget and actual turnouts of revenue and expenses.

Estimating Starting Up Costs

Starting up capital is the one-off seed money needed to start the business. Typically, start-up capital includes money for such things as company formation expenses, plant and equipment if applicable, office or premise setting up, furniture, fittings, office equipment, initial stationery and other one-off expenses that are necessary to be paid up before business can commence.

Included in starting up costs are recurrent expenses for the period that you think will take the business to break even, which is usually at least six months and more. During this period, you will partly be financing the business using savings or borrowing.

Estimating Recurrent Costs

Recurrent expenses which are costs that are incurred regularly as the business operates such as rent and salaries. Recurrent costs fall into the following sub-categories:

  • Variable costs are costs that vary depending on how many units are produced and sold. Included in this category are the cost of goods produced (sold), selling and delivery costs, and any other cost that vary with output but cannot be associated directly with any unit of output.
  • Fixed costs are costs such as rent and administration expenses that do not change whether anything is produced and sold or not.

When preparing a recurrent budget for more than one month, income and expenses should be placed in the months they are expected to occur. Where revenue and expenses occur, depends on the plans that are in place and the varying conditions and seasons that the business undergoes. The information in the business plan is used to prepare the budget. Previous year’s numbers and reasonable assumptions based on prevailing market conditions are also used. The main elements of a budget namely revenue and expenses can be adjusted in an iterative budgeting (prioritization and allocating) process until a desired but realistic and attainable profit position that can be adopted is established.

Contents of a Budget

For an individual, recurrent expenditure includes things like tithes, offerings, savings and investments, taxes (if you dealing with gross income), rent, household goods and groceries, transport and vehicle maintenance, entertainment, insurances, and miscellaneous expenses such as debt payments. A personal is very useful for tracking sources and uses of cash (income) on monthly basis.

The budget should be presented in the form of a detailed statement of financial position featuring all revenues and expenses. The difference between the forecasted income and expenses is forecasted profit/surplus if positive or loss/deficit for the year of budget if negative. The aim should be to have income being more than expenses so that there can be a profit but the normal experience for a business is to have a break-even position for the first two to three years and a profit thereafter. However, an individual is expected to cut his or her budget according to income including the amount required for saving. An individual may budget for a deficit if they have an idea of how to bridge the deficit.

Five Jars Budgeting Concept for a Personal Budget

An important principle in personal budgeting is to separate net income into five parts namely spending, saving, investing, offerings and tithing. Craig Hill in his book entitled Five Wealth Secrets (2018) recommends keeping your net income in five jars each containing 80% net income for spending, 3% for saving, 4% for investing, 3% for offerings and of course the mandatory 10% for tithing. Savings are for short-term purposes such as emergencies or buying necessary household appliances. Investing is for medium and longer-term goals for acquiring income-generating assets such as real estate or a business. Offerings or Alms money is used to support needy people or noble causes and is also used to support the work of God such as Sunday service offerings in the case of Christians. Tithe money is strictly for supporting the work of God as explained in the Bible for Christians.

Having five jars may need five bank accounts with one income receiving account feeding the other four through standing transfer orders or one bank account broken into five parts in an office or home book of accounts like an Excel software spreadsheet. All these five categories should have budget lines and amounts in the budget. Savings are usually for short-term purposes while investing is normally for long-term goals.

A Complete Budget

A complete budget should have precise and concise notes explaining the nature and purpose of the amount in each budget line. These notes will later help in explaining variations between the actual performance of each expenditure line and its budgeted amount.

Below are examples of one-off and a monthly budget:

Table 1: One-off outlays (US$)

Formation: For registration, or partnership deed or incorporation250
Consultancy: Any third party services such as accounting or legal200
Rent Deposit: First-month rent and 3 months deposit1,000
Redesign, refurbishing, restructuring and decoration of premises2,500
Licenses and permits100
Stationery: Letterheads, logos, business cards and office stationery500
Utilities: Internet, electricity and water connection deposit fees100
Initial marketing and sales material100
Website development costs500

Table 2: Monthly revenue and expenditure statement (Budget)- US$

Cost of Goods Sold26,11227,25028,03030,65031,29532,21532,26532,26532,46532,46531,17333,815370,000
Gross Margin33,88834,75036,97039,35040,70542,78542,73542,73542,53542,53539,82741,185480,000
Operating Expenses31,02711,48714,56717,64712,06715,79722,09711,93713,92223,21710,47317,762202,000
Operating Profit2,86123,26322,40321,70328,63826,98820,63830,79828,61319,31829,35423,423278,000
Non-operating Income 


























Non-operating Expenses6005407204204805166367325646126005766,996
Profit Before Tax7,26127,22327,68324,78332,15830,77225,30236,16632,74923,80633,75427,647329,304
Provision for Tax2,1788,1678,3057,4359,6479,2327,59110,8509,8257,14210,1268,29498,791
Net Income/Profit5,08319,05619,37817,34822,51121,54017,71125,31622,92416,66423,62819,353230,513

Budget Monitoring (business context)

The budgetary system involves creating an income, expenses and capital budget amount for each activity on a line-by-line fashion. Followed by comparing the actual performance of each activity with its budget monthly, scrutinizing the deviations from the budget to discover the reasons behind the deviation (variances) of the actual performance from the budgeted, taking appropriate corrective actions and reviewing of the budgets in the light of the changes in circumstances. To facilitate effective monitoring of the income and spending budget, the various revenue and expenses heads should be broken down into their smallest components (budget lines) and each component should have a budget account known by name and number and a budgeted amount in the account. In other words, the budget should have the same structure in terms of accounts (budget lines) as General Ledger (GL-book of accounts) which contains actual amounts of transactions.

This is necessary to facilitate comparison of like and like that is the actual revenue registered and expenses incurred with the related budget amounts. The two systems (the GL and budget) should be operated in a parallel manner where the GL carries cumulative actual amounts registered and the budget system carrying comparative mirror amounts in form of budgeted amounts. To ensure that this happens with ease, there should be reference instructions manual explaining where each possible asset, liability, revenue and expenditure transaction that can be recorded in any operation would be placed in the budget during budgeting and eventually posted in the GL when it occurs such that each budget line has a mirror line in the GL. Such clarity avoids mismatching the budget with related actual amounts in the GL and also avoids miss-posting of amounts to wrong accounts. Table 3 below shows how variances may be computed and analyzed.

Table 3: Budget variance analysis for a business for the Quarter ended March 2010

US$ActualBudgetVarianceVariance %
 ABc = a-bc/b x 100
Recurrent Expenditure (OPEX)
Net Profit

Depending on the scale of operations or the nature of the item involved, any variation of ±5% and more may be investigated and necessary action taken to bring performance in line with plans. It is useful for example to ask the following questions:

  1. Is the profit lower or higher than last year or budget, and if higher or lower, why?
  2. Is the profit higher or lower than similar businesses? If lower what can be done to do as well as others?
  3. Is the lower profitability a short-term or long-lasting problem?
  4. What actions can be taken given the information being revealed by the budget analysis?

Importance of a budget as a profitability management and control tool cannot be overstated. In business, monitoring of sales and control of costs is necessary to have control over the desired profit. These factors should be closely monitored and kept in line with the budget. The thing that helps in this is the budget. The same goes for any project that is undertaken. Each project should have an income and expenditure mini-budget that is closely monitored to keep activities within plans.

Flexing the Budget

A budget is based on some assumptions on sales and expenses that may not all hold throughout the operating year. A certain level of sales may be expected at the end of a quarter but a higher or lower level may be realized.   If a higher level of sales than was budgeted is achieved at a higher cost than was budgeted, it follows that the budget should be recomputed or flexed to see what would have been the budget commensurate with the higher level of sales so that a relevant variance can be computed. To perform this flexing, the percentage of each cost to sales in the fixed budget is used to arrive at the new level of costs in the flexed budget that are commensurate with the actual sales recorded. Table 4 below illustrates this point more clearly.

Table 4: Flexed budget versus fixed budget

Fixed BudgetFlexed Budget
US$% to sales BudgetActualBudgetVarianceActualBudgetVariance
Gross Margin22.3%1,6141,4161981,6161,629(13)
Direct Costs9.4%691597946896872
Gross Profit12.9%923819104927942(15)

The table above shows business has recorded US$959 more sales than budgeted but has in the process used US$761 more in materials and US$94 more direct costs than were budgeted in the fixed budget. These two cost variances are misleading because they are based on budgets that should have yielded a lower sales amount of US$6,361 but as it is, a higher sales amount of US$7,320 has been achieved. Using the cost ratios to sales shown above, the flexed cost budget that corresponds to the higher sales amount attained should be US$5,691 for materials and US$687 for direct costs as stated in the flexed budget. The relevant variances that should be interrogated for materials should therefore be US$13 for materials and US$2 for direct costs and not US$761 and US$94 respectively as indicated in the fixed budget. The importance of flexing the budget allows you to focus on true variances when appraising performance. This flexing can be done every time variances are being computed and analyzed.

Preparing and monitoring a Personal Budget

A personal budget is a template containing identified income and prioritized personal (Household) expenditure for a period like a week, a month or a year. The main purpose of a personal budget is to help in monitoring and controlling spending to be in line with income or generate a surplus for saving or other desirable activities. One of the things that aid in the achievement of goals is an industrious search of income and prudent and disciplined spending. Without a budget that is monitored, spending may go haywire and you would not know whether plans are on track or not. Out of control expenditure can result in living out of your means which can put you in serious financial trouble and embarrassment such as when obligations like rent or electricity bill are due but you have no money to pay. To be able to know how much income you have and what your expenditure is like at any one moment, you need to have a weekly or monthly budget that is monitored. The whole purpose of budgeting is so that you can determine your current income and cut your spending budget according to this means and hopefully create money for saving and investing or other desirable activities. The thing in saving money is to know how much you are spending and on what items. It is not possible to know how you use your money unless you track it. No matter how small your earnings are, you should have a budget of how you plan to spend any amount of it. This practice will allow you to prioritize the allocation of your income no matter how small it is.

For one month, keep a record of everything you spend. That means everything including groceries, utilities, coffee, fuel or gas, luxury items, every newspaper and every snack you purchase for the entire month. Keep receipts or a record of everything you spend on. Once you have the data, group these numbers in categories like groceries, utilities, gas/fares, car payment/insurance/parking, cable/satellite TV, phone bill etc and get the total for each category. Check also to identify if there are high and untenable expenses such as higher than normal rent or other unnecessary expenditure like expenses on luxury items and do something about these. Now that you have a good idea of what you spend in a month, you can build a budget to plan your spending. Remember to include expenses that happen regularly, but not every month, like car maintenance and check-ups. Not to be forgotten also is untenable debts such as credit cards payments and other loans that have become a problem and create a plan for dealing with these.

The personal budget as a control tool should have four columns for the description of items, estimated amounts; actual amounts once they are known and the difference between budget and actual amounts (see the table 5 below). The budget below can be per day, week, month, quarter or year but more effective tracking is per month. If a monthly budget is kept, the actual expenditure numbers can be built from daily spending where daily expenses are captured on payment receipts or making a note of them on memorandum registers when there are no receipts. The monthly total of each expenditure item is posted to a table like the one below where variances can be identified and acted upon.

Once you see the picture of your income and expenses, you can look for ways to reduce your expenses or increase your income to locate an amount of money that you can afford to save. This is how the world’s largest corporations do it and this is how most of the world’s successful business people do it too. A budget needs reviewing at least once a year or as frequently as necessary to keep it in line with reality. You may have your budget as follows:

Table 5: Personal Monthly Budget

Item DescriptionAAc (b-a)
Salary and other incomes-self3,0003,0000
Salary and other incomes-spouse1,0001,0000
Rent income-rental property1,0001,0000
Other: List other income you would like to  track5005000
TOTAL INCOME5,5005,5000
Home Mortgage or Rent1,0001,0000
Home Insurance25250
Credit Card-11001000
Credit Card-275750
Credit Card-345450
Car Loan Payment2002000
Car Insurance65650
Public Transport50500
Health Insurance45450
Cable and Satellite Television55550
Internet Access60600
Mobile Phone Bill359560
House Help40455
Pet care02020
Gym Membership15150
Electric Bill508030
Water Bill25305
Unplanned: Vet Bill05050
Unplanned: A dinner party07070
Unplanned: Car repairs0250250
Unplanned: Miscellaneous Expenses07575
Unplanned: General Repairs0250250
Total Expenses2,2753,250975
Difference Between Revenue And Expenses3,2252,250-975

As far as this simple budget goes, there was supposed to be a surplus of US$3,225 over expenditure but this turned out to be US$2,250 because of budget overruns on some expenditure items. This means you can afford to save, invest or do other things with US$2,250 monthly to achieve your goals. However, you can get more savings from the budget if you can tame the variations such as phone bill and groceries. Once you have critically analyzed your budget and cut on non-essentials and settled on an attainable amount to save, make this amount one of the budget lines, perform this budgeting monitoring ritual monthly and stick to it to realize your goals of savings or any other goals that require money. The amount that can be saved can be divided into the amount to be saved for short-term goals and the amount for long-term goals. Alternatively, the whole amount can first be applied to achieve short-term goals before using it to achieve long-term goals after short-term goals have been fulfilled. The above budget does not reflect the principle of five jars or accounts but it can be prepared to include the five budget line categories namely spending, saving, investing, offerings and tithing.

Cashbook Reconciliation

A cashbook is a personal record of cash inflows and out outflows and has the bank account as its mirror record. It is a good practice of personal financial planning to record all cash transactions in a register (cashbook) and compare the transaction this register with the postings in the bank account to highlight differences caused by time lags, bank entries, errors and even fraud, for interrogation and necessary actions.

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