Sanderson Abel
“There is one fact about money that most people will agree with: there never seems to be enough of it. Paying bills can be stressful, and the lack of financial resources can strain relationships too. Fortunately, creating a budget can help families to plan their expenses and meet their monthly obligations.” A budget is a plan on how money is going to be spent. There are reasons for budgeting such as financial and personal.

Budgeting can be good or bad. Generally, budgets are intended to bring positive results to the one who projected it or to the person or organisation which it is intended for. If a budget is developed in the proper way and is followed religiously, it will not fail us. It should be noted that the budget per se will not bring success or failure. The reason why the budget can succeed or fail depends on how the budget is done and how we respond to the budget. The budget is only a tool which is meant to help us and we should not expect the budget to give us results. The budget is hence meant to help achieve our success hence the onus is on us as individuals or corporates to make the budget work for us.

A budget premised on the wrong assumptions brings about negative effects. Premised on the wrong assumptions, the budget will produce undesirable results because of the inherent flaws underpinning its crafting. If a budget is flawed, it is destined to fail no matter how we might attempt to stay within its confines. In this case it is the people behind the budget who will be wrong and not the budget per se.

A problem with individual budgeting is failure to estimate properly certain expenditures. It has been realised that consumers are typically quite good at estimating the normal expenses in life, such as groceries and utilities. But they are so bad at estimating unexpected costs that crop up that they regularly overspend, under-save and blow their household budgets. Consumers are always reluctant to do market research to gauge the cost of some of the items they budget for which end up being far more than their expectation, hence resulting in the budget exceeding expectation. A challenge with budgeting is the definition of exceptional expenses. Usually consumers have too narrow a definition of an exceptional expense because they have trouble categorising it. For example, how should you categorise buying a new suit for a family wedding? Is it part of regular clothing expenses, part of a special occasion budget category or is it so unusual that it is an exceptional expense that has no bearing on an ongoing budget?

Such confusion results in overspending across what consumers view as isolated purchases that have no budget constraint.

Studies have realised that consumers might overspend by about 20 percent when they view a purchase as an exception rather than part of normal spending. The implication is that the budget goes burst and it might be difficult for them to recover.

A weakness that has been found with individual or household budgets is the lack of an inbuilt emergency fund. An emergency fund should be an essential component of every budget. It can help you finance unexpected expenses like medical bills so you don’t have to pull income from other areas. Since you never know when a rainy day will come, it is important that you factor a contingent fund into your budget so that at least you have a shield against the unforeseen. Those people who operate with a budget without a contingent fund usually find themselves in a dilemma when the unexpected happens. This might involve borrowing, which then compromises the budget outcome for the subsequent months.

Also consider that many unexpected costs aren’t unexpected. People have a tendency not to budget for them. Christmas falls on December 25 each year but people rarely budget for it way ahead of time yet this holiday tends to trigger a financial tsunami that can put household budgets in a tailspin.

The same applies with things like back-to-school expenses, car tags, traveling for your child’s sporting events. These types of expenses are predictable and we’re able to plan for them, but so often we don’t work them into a budget due to them not occurring monthly. Failure to track the budget is another common challenge households make. Once a household budget has been created, it’s necessary to track expenses and income. After several months, it’s possible to judge how well actual expenses measure up against those forecast. Budgets should be reviewed each month. The process should be dynamic, and families need to be prepared to make adjustments to stay within their plan. While it’s nice to remove the stress of falling behind on bills, keep in mind that everyone needs to enjoy life too. Changing purchasing habits or downsizing a home makes sense if that’s what it takes to balance a budget. People are often surprised at how stress-free life can be when both a budget, and one’s life, strikes a balance.

Sanderson Abel is an economist. He writes in his capacity as senior economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on [email protected] or on numbers 04-744686 and 0772463008

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