From Leftovers to Priority: Transforming How You Save and Build Wealth

For many years, the traditional formula for savings was:

Income – Expenses = Savings

This approach often led to disappointment. By the time all the bills and discretionary spending were accounted for, there was little to nothing left to save. It was a reactive approach, where savings were an afterthought rather than a priority.

The new, more effective formula, which many financial experts now recommend, is:

Income – Savings = Expenses

This formula flips the script entirely. It treats savings as a non-negotiable expense that you pay first, immediately after receiving your income. This is often referred to as “paying yourself first.” By automating a transfer from your checking account to a savings or investment account, you ensure that you are consistently building wealth without relying on willpower.

Defining a Budget

 A budget is a plan for your money. It’s a detailed list of your income and your projected expenses over a specific period, typically a month. The purpose of a budget is to help you track your spending, manage your money effectively, and work towards your financial goals, such as paying off debt, saving for a down payment on a house, or building a retirement fund.

 Strict vs. Flexible Budgets

When creating a budget, you have two primary approaches: a strict budget or a flexible budget.

• Strict Budget: A strict budget assigns a precise, often rigid, amount to every single spending category. For example, you might allocate exactly ₦40,000 for groceries, ₦15,000 for dining out, and ₦5,000 for entertainment. This approach demands a high level of discipline and detailed tracking. While it can be highly effective for individuals with specific, short-term goals (such as paying off a credit card within a few months), it can also be challenging to sustain. One unexpected expense or social event can derail the entire plan, leading to feelings of failure and a tendency to abandon the budget altogether. This is why a strict budget is often only successful for individuals with a specific, highly disciplined personality type.
• Flexible Budget: A flexible budget is a more forgiving and realistic approach. Instead of setting rigid dollar amounts for every category, it focuses on allocating percentages of your income to major spending areas. This allows for more wiggle room and acknowledges that life is unpredictable. If you spend a little more on groceries one week, you can adjust by spending a little less on entertainment the next. A flexible budget is easier to stick with over the long term because it adapts to your life, rather than forcing your life to adjust to a rigid plan.

 Popular Budgeting Rules

Two of the most well-known flexible budgeting rules are the 50:30:20 rule and the 70:20:10 rule.

The 50:30:20 Rule (with Savings and Charity)

In this version, the 20% allocation is split between your savings and charitable giving. You can decide the specific split between these two categories based on your personal goals and values.

• 50% for Needs: This covers your essential expenses like rent, utilities, transportation, and groceries.
• 30% for Wants: This is for non-essential spending on things that improve your quality of life, such as dining out, entertainment, and hobbies.
• 20% for Savings and Charity: This portion is for building your financial future and supporting causes you care about.

Example: If your monthly take-home pay is ₦400,000:

• Needs (50%): ₦200,000
• Wants (30%): ₦120,000
• Savings and Charity (20%): ₦80,000 (You could, for example, allocate ₦60,000 to savings and ₦20,000 to charity, or any other split you prefer).

 The 70:20:10 Rule (with Charity)

In this rule, the 10% that was previously allocated to debt repayment is now dedicated to charity.

• 70% for Living Expenses: This covers all your needs and wants, including housing, food, and entertainment.
• 20% for Savings: This is a dedicated portion for your savings and investments.
• 10% for Charity: This is a clear, dedicated allocation for your charitable giving.

Example: If your monthly take-home pay is ₦400,000:

• Living Expenses (70%): ₦280,000
• Savings (20%): ₦80,000
• Charity (10%): ₦40,000

Steps to Budgeting

Regardless of the method you choose, the basic steps to creating a successful budget are universal:

1. Calculate Your Income: Start by determining your total take-home pay (after taxes and deductions). If your income is variable, use an average from the past few months.
2. Track Your Spending: For one or two months, meticulously track every single dollar you spend. Use a spreadsheet, a budgeting app, or a simple notebook. This step is crucial for understanding your current spending habits.
3. Identify Your Fixed and Variable Expenses: Categorise your expenses. Fixed expenses are the same amount every month (rent, car payment). Variable expenses fluctuate (groceries, utilities, and entertainment).
4. Choose a Budgeting Method: Based on your personality and financial goals, decide whether a flexible percentage-based rule (like 50:30:20) or a stricter method is right for you. For most people, a flexible approach is more sustainable.
5. Set Financial Goals: Define what you want to achieve with your budget. Do you want to save for a vacation, build an emergency fund, or pay off a specific debt? Having clear goals will provide motivation.
6. Create Your Budget: Using the information you gathered, create your actual budget. Allocate your income to your chosen categories.
7. Monitor and Adjust: A budget is not a set-it-and-forget-it tool. Review your spending regularly to make sure you are staying on track. Be prepared to adjust your budget as your income or expenses change. Your budget should be a living document that evolves with your life.

 By prioritizing savings and treating it as a non-negotiable expense, you can ensure you are consistently building wealth. Whether you choose a strict or flexible budget, the key is to create a plan for your money and stick with it. The 50:30:20 and 70:20:10 rules offer sustainable, flexible frameworks that can be adapted to your personal needs. Ultimately, budgeting is a dynamic process. By regularly monitoring and adjusting your budget, you can stay on track to achieve your financial goals and build a secure future.