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Understanding Financial Wellness

Financial wellness is a process of understanding your financial goals and making informed and effective financial decisions to meet these goals. It’s about being in control of your finances, managing financial responsibilities, and having the capacity to handle financial shocks. When you’re financially well, you have the flexibility to make choices with less risk exposure and stay on track to meet your financial goals.

The Importance of Budgeting

A key component of financial wellness is budgeting. Budgeting helps you understand and manage where your money goes, ensuring you avoid unplanned spending. When you receive your income, having a clear budget allows you to plan your expenditures and make informed decisions about your finances.

What is a Budget?

A budget is a plan you write down to decide how you spend your money each month. It governs your financial transactions and ensures you stay on track with your spending. As the saying goes, a budget is telling your money where to go instead of wondering where it went.

Types of Budgeting

1. Zero-Based Budget
   • Starts with the assumption that all expenses are zero and must be rebuilt from scratch.
   • Every expense must be thoroughly vetted and justified.
   • Helps avoid unnecessary expenditures and ensures you have a plan for every shilling.
2. Envelope System Budget
   • Similar to the zero-based budget but uses cash for budgeting.
   • Allocate cash for each category and place it in labeled envelopes.
   • Avoid borrowing from other envelopes to prevent running out of cash before the end of the month.
3. Pay Yourself First Budget
   • Ideal for those struggling to save.
   • Allocate a percentage of your income to savings before spending on other expenses.
   • Helps prioritize savings and investment.
4. 50-30-20 Budget Rule
   • Allocate 50% of your budget to essential expenses, 30% to discretionary expenses, and 20% to savings and debt payments.
   • A practical method that helps identify necessary expenses and promotes financial discipline.

Sample Budget

To illustrate, let’s create a sample budget for someone with an after-tax income of 100,000 per month using the 50-30-20 rule:

• Essential Expenses (50%): 50,000
  • Rent: 20,000
  • Utilities: 5,000
  • Groceries: 10,000
  • Transportation: 5,000
  • Insurance: 10,000
• Discretionary Expenses (30%): 30,000
  • Entertainment: 10,000
  • Dining Out: 5,000
  • Shopping: 10,000
  • Hobbies: 5,000
• Savings and Debt Payments (20%): 20,000
  • Savings: 15,000
  • Debt Payments: 5,000

Achieving financial wellness requires planning and discipline. By understanding your financial goals and creating a budget, you can take control of your finances, manage responsibilities, and prepare for financial shocks. Stay tuned for our next post where we will dive deeper into budgeting techniques and examples.

Thank you for reading! I hope you found this helpful. For more personalized advice, contact us at Tamara’s Personal Financial Planning and Consultancy at +254 777 675977.

Tamara Were, your financial advisor from scratch to the top. Let’s move into millions together!