Money skills

Topic 2:
A step-by-step
guide to creating
your own budget,
and sticking to it.

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Contents
Introduction 4

What is a budget? 4

Needs and wants 4

Budgeting 5

Useful calculations 7

Making a budget work 7
Felix Nazari creates a budget and sticks to it
As a tour guide, I earn different amounts of money every day. Tourists mostly pay
in cash and, until recently, I’ve had little control over the amount of money I earn
or spend. It’s easy to lose track of your money when you always have cash in
your pockets!

I realise the importance of creating a budget and working more carefully with my
money, if I want to purchase my own home. I still pay rent to a landlord, but I’m
planning to move out as soon as I can afford a deposit on the right property.

The cost of living is expensive, and I need to manage the cash I earn far
more responsibly.

What is a budget?
A budget is a tool to help you keep track of your money, so you can see exactly how
much you’re earning, and how much you plan to spend, and on what. With smart
budgeting, your financial life can become smooth and predictable – you can see
exactly where you’re going and what the road forward holds.

Needs and wants

Before you put a budget together, you need to understand the difference between ‘wants’
and ‘needs’.

‘Needs’ are things you rely on to survive.

You need accommodation. You need food, water, basic clothing, and a cell phone to stay in
contact with family, friends and colleagues.

‘Wants’ are the extra things that make your life good.

While you could live without them, there are certain things you’d really like to have. It could be
the latest cell phone, a fashionable wardrobe, or eating out and other luxuries.

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Budgeting
To budget, you will need to spend some time thinking about your money and writing down your income and expenses,
before you can start planning. It does take time and commitment, but once you’ve got a grasp on where your money comes
from and what you want to do with it, you’ll find it easier to plan your financial well-being.

Budget step 1: Record your total income

• Income is the money you make, earn or receive.

• If you earn a set salary or wage, recording your income is easy to do.
• If you earn money part-time or have your own business, this is a little harder.

“I get paid cash in hand every day, and I didn’t know how much I was earning until I started recording it daily
for my budget.”

• It’s important to know the money that you’re guaranteed to earn or expecting to receive.

Budget step 2: List monthly expenses

• Expenses are things you spend money on.

• When you list your expenses, write down everything you can think of.

It’s a good idea to over-budget for expenses – write down more rather than less. This will help you cover
all the important things you need to pay for regularly, while possibly also having some money for covering an
unexpected expense.

Budget step 3: Calculations

Remember mathematics and calculations? Well, this step of budgeting requires you to do a minus sum.
Subtract your expenses from your income
A bit of simple maths and you’re left with… hopefully a positive number! Here’s where you see just how much of your
money is left after you’ve paid what you need to pay. This is important, as it shows you how much you can spend on
your wants. All those expenses you listed earlier were needs, and they always have to take priority. Whatever you’ve
got in your wallet after you’ve covered your needs is what you can spend on smartphones and expensive clothing.

Budget step 4: Make adjustments

An adjustment is a small change, moving things around, pulling something in the other direction.
• If you’ve reached a negative total, then it is clear that your expenses exceed your income!
You’ll have to adjust the amount you’re paying for some expenses to make sure that you cover the most
important ones.
• Some of your expenses might be variable – they can change, and you can increase or decrease them. For example,
you may be planning to live well and spend more money on good food, but your budget says you can’t afford it.
• You’re going to have to sacrifice some of your ‘wants’ and eat a little cheaper to make ends meet.

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 Budget step 5: Save
• Life is unpredictable. You often need money for expenses that you didn’t plan for. If you spend all the money that
you earn, you will be left with nothing and you will have no money for your future or for unexpected expenses or
loss of income.

• You should be saving as much as you can afford every month.

Open a savings account and invest in your future. Your savings will help you out in difficult times, and help you
achieve your dreams and goals the right way.

Budget step 6: Change direction if you need to

• Sometimes the best way to get around Cairo’s traffic is to go in the opposite direction, and work your way around
the back of the city. In the same way, you need to keep an eye on your budget, writing down what you’re earning
and spending, and you need to check that the numbers line up properly. If not, you need to change direction.

• It is important to be honest with yourself and take a closer look at your income and expenses. How much are you
really spending on food every month? Could you get away with spending less on clothes? A budget is rarely the
same every month; you have to live it first and then adjust it when necessary.

There is an old proverb from the desert lands that says:

“Stretch your legs as far as your blanket extends.”
If you stretch your legs out too far, beyond your blanket or sheet, your feet
might be cold. Don’t stretch your money past the place of comfort or you may
end up being uncomfortable too.
Source: Arabic.desert-sky.net. (2015). Egyptian Arabic proverbs (‫)ةيرصم لاثمأ‬. [online]
Available at: http://www.arabic.desert-sky.net/coll_proverbs.html [Accessed 25 May 2015].

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Useful calculations
Since we’re dealing with numbers, it should come as no surprise that there are some calculations to solve …they’re useful
equations to get familiar with.

Cash flow statement Total income − total expenses = cash flow

Your cash flow should have been calculated already for planning your budget. It is the
basic component that shows you, at least roughly, how much money is left in your
bank account after your expenses have been taken care of.

Net worth calculation Total assets − total liabilities = net worth

This is similar to your monthly budget, only on a much bigger scale. Your assets are
everything you own, from your bed and blankets to vehicle or home. Everything you
could sell and everything in your bank account added together are your assets.
Your liabilities are all the things you owe money for. Many people purchase cars,
houses and clothes using credit cards – creating debt. Debt is a liability as it’s
money that must be repaid to the lender or bank.

After doing this calculation, you’ll know how much you’re worth. Money-savvy people
will take their budget to this level as it allows them to control their money and plan
ahead. If you know how much cash you’re able to pull together in an emergency,
you can plan for any eventuality.

Remember, a budget tells you what you can earn and spend, but it can’t keep you from spending!
You’ll have to be disciplined in sticking to your budget.

Making a budget work

Even the best budget will fail if you are not willing to adhere to it daily. Although it might seem like a cumbersome task
to keep track of each day’s expenses, you should make it part of your daily routine and congratulate yourself for doing it.

This new-found financial awareness will change the way you spend money, allowing you to avoid financial trouble.

If you’re careful with your money, you can make sure that all your needs are covered, and you still have enough left over to enjoy
occasional treats and luxuries.

A budget is not only important in the short term, on a daily or monthly basis, it also helps you save towards bigger goals.

Pro tip: There are even some apps available for your phone or online
which can help you keep track of your daily expenses.
Even more reason to get on top of your finances!

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