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As-Salaam Alaykum dear readers,
Today, I would like to introduce the basics of budgeting as a critical skill in improving your personal financial management. It is important to understand what exactly a budget is, and how it helps you understand what you earn and how you are spending that income. A budget is a plan that looks at Income and Expenses and helps you understand how you much you make and spend over a specific period of time. We are going to begin by examining the elements of a budget to help us get a monthly / annual view on on our spending.
Elements of a Budget
Fixed Expenses: These are expenses that stay the same from month-to-month and typically include things such as:
- Your rent or mortgage payment
- Any student loans, car loans or equivalent debt on lines of credit
- Any of your monthly, recurring entertainment expenses (think Netflix, Spotify, mobile phone contract, gym membership, car insurance, house insurance etc.)
Variable Expenses: Expenses that change from month-to-month, such as:
- Electricity / water and utility payments
- Food and groceries
- Petrol / gas for your vehicle
- Restaurants and eating out
- Ad-hoc entertainment expenses such as cinema and events
Both of these add up to your Total Expenses, which represent all of the money you are spending on a monthly basis which should give you an average number across 12 months.
Total Monthly Income: This represents all of the income that you make in a month including:
- Salary from your job
- Side-hustle and cash jobs
- Investment dividends
- Pensions
- Government assistance and social security pensions
- Rental income on your properties
- Anything else that generates money for your every month
It’s quite easy to see that we need to insure that your Total Monthly Income > (is greater than) your Total Expenses (which is your Fixed Expenses + Variable Expenses). Whatever is left is considered your Disposable Income, which can be used for investments, savings and emergency funds and also provide the basis of establishing a great savings rate.
Building a Monthly Budget Worksheet
Here is an example of a monthly budget worksheet with example values to help you get started on getting your financial information down on paper. Don’t forget to utilize tools like your banking app or Mint to help you easily understand what you’re actually spending.
In my example, Adam is a business professional that lives in London, UK. He is in his mid-30’s, owns his own vehicle but rents a 540 Sq Ft furnished flat on the outskirts of the city. He started investing early in his career and is now receiving some healthy dividend income.
Gross Income Worksheet (before Taxes) Monthly Amount (£)
| Wages, Salary and Bonuses | 2700 |
| Investment Income / Dividends | 340 |
| Rental Income | 0 |
| Other Income (Pensions, Government Aid, etc.) | 0 |
| Total: | 3040 |
Taxes Withheld and Deductions Monthly Amount (£)
| Income Tax | 387 |
| National Insurance | 278 |
| Pension Contributions | 61 |
| Total: | 726 |
This leaves Adam with a Net (Take home pay) wage of £ 3040 – 726 = £ 2314 / month.
Now lets begin to take a look at some of the expenses Adam has:
Fixed Expenses Monthly Amount (£)
| Rent | 1300 |
| Car Insurance | 39 |
| Internet | 24 |
| Student Loans | 0 |
| Car Loans | 0 |
| Gym Membership | 10 |
| Netflix, Spotify, Apple etc. | 25 |
| Total Fixed Expenses: | 1398 |
Variable Expenses Monthly Amount (£)
| Utilities | 146 |
| Groceries | 270 |
| Petrol/Gas | 140 |
| Restaurants | 120 |
| General Entertainment | 80 |
| Total Variable Expenses: | 756 |
Based on our budgeting example, Adam has Total Expenses (Fixed + Variable) of: £ 2154 / month.
Looking at our Net take home pay minus our Expenses: £ 2314 – £ 2154 = £ 160 / month left over as Disposable Income for savings, emergency funds and additional investments. Adam should probably focus on reducing his expenses by finding a LCOL (lower cost of living) area if possible to try to reduce his expenses.
Budgeting Tips
- Avoid car loans as much as possible. If you are not making enough money to pay for something like a car, taking a loan will only make it worse for you.
- Reduce your entertainment expenses. Almost every streaming service, app or entertainment package has a recurring monthly charge. Take an honest look at how much you are using these services and see if there are free alternatives.
- Vacations from a dedicated vacation fund, not from debt. It helps to setup a vacation fund and slowly add to it every month. Don’t put your vacation on high-interest credit cards or lines of credit.
- If you have credit card debt, consolidate to lower interest rates and pay more than the monthly minimum. A major issue when it comes to debt is thinking that things will be okay by paying the minimum on the credit card. Those interest payments add up and will cost you a lot over time. Think about consolidating to lower interest line-of-credit if you can.
- Cut back on expensive nights out-on-the-town. Reduce how much you go out, and find cheaper places to reduce your expenses. Many people spend much more than they should eating out and on entertainment which can really cut into your disposable income.
- Limit your spending on expensive clothes, shoes, purses and accessories. Lifestyle creep and keeping up with others is a fast way to become working “poor”. Does it really matter if you have another Armani shirt or Coach bag?
I hope this post on budgeting basics was interesting and insightful. I will definitely come back in the future to break down this topic in greater detail. As usual, I would love to here any comments, feedbacks or suggestions on new topics on the Muslim Financial Independence Blog or on my twitter @muslimfinancial. See you all soon!
As-Salaam Alaykum