Your salary is not the problem until you know where it goes
The salary alert hits, and for a while, things seem alright.
You have been eagerly anticipating its arrival; now you will be able to settle that outstanding bill, get some food, arrange for transportation for the month, send some money to your family, and even save some for yourself.
And then, spending starts.
A few days down the line, you have spent on data, food, transportation, subscriptions, among other little things which you hardly even notice. Plus there was some unexpected expense as well. And before half of the month passes, your bank balance already looks scary.
So what went wrong? What if the problem here was not earning more money, but rather managing the money you have more efficiently?
The basis of salary management consists of creating a plan for your income beforehand. It is important to know how much you earn, where your money goes, what you can afford, and what needs to be saved for the future.
In this guide, I will demonstrate to you how to create a salary system that will suit you personally, manage your expenses during the month, save systematically, provide yourself with financial reserves for the future, and avoid unnecessary borrowing.
However, to create such a budget, you should understand what is going on with your money.
Find Out Why Your Salary Disappears
If you find yourself running out of money before your next pay day, then the first thing to ask is not, “How do I save more?” but, “Where is my pay going?”
You might be spending more than you think. Little items can soon become big bills. You could be paying high rent, having high transportation costs, or having lots of other expenses that reduce your pay considerably before you spend any on yourself.
This is not the same problem and needs a different solution.
What Is Actually Draining Your Salary?
First, evaluate your expenses of the past month and answer these questions:
- Am I overspending on unnecessary things?
- Do my essential expenses consume all of my salary?
- Am I consistently surprised by unexpected expenses?
- Am I borrowing money to survive each month?
It will be very important.
In case of spending money without monitoring, you have to manage your spending more effectively. In case of consumption of all your salary by essential expenses, you may either lower some major expenses or raise your salary. In case of regular surprising expenses, you have to plan them.
Before solving the problem of your salary, define what exactly the problem is.
Know How Much Salary You Actually Receive
Before allocating your finances into saving and spending budget, it is important to know the total available amount of your finances.
What is written on your job offer is not necessarily the total amount that is being paid to you monthly. And here comes the importance of understanding gross salary and take-home salary.
What Is Gross Salary?
The gross salary refers to the salary before any deduction. That is, gross salary is the total salary calculated by your employer prior to deductions.
This means that your job offer may indicate a gross monthly salary of ₦300,000. However, you do not necessarily get the full ₦300,000.
What Is Take-Home Pay?
Take-home pay, or net pay, refers to what remains from your gross pay once the deductions have been subtracted from your gross pay. This is the money that is actually available to you.
Therefore, if your gross pay is ₦300,000 and your deductions leave you with ₦250,000, then the salary budget should be calculated based on the ₦250,000 that you receive.
It is wise to verify your take-home pay by checking your payslip and bank statement.
You can use the reliable allowances or additional income if you can be sure to receive them regularly. However, your budget should not be made based on the income that you cannot reliably expect.
For instance, you should not make budget plans based on the bonuses, gifts, or money that you hope will be sent to you.
Track Your Spending Before Creating a Budget
It is impossible to make a realistic salary budget if you have no idea what you currently spend.
Most individuals make guesses about their spending based on their memories. They could be saying, “I probably spend something like ₦30,000 on food,” but will soon realize that they actually spent a lot more at the end of the month.
To better control your salary, stop making guesses. Monitor your spending.
How Do You Track Your Spending?
Do this for the next 30 days:
1. Do this on the next spending day. Do not wait for the next month. Create a note on your phone or get a small notebook and begin noting your expenses.
2. Note the expenses immediately. Note the item, price, and purpose of the expense. Do not depend on your memory to do this at the end of the day.
3. Note all your expenses. Note the ₦500 snacks, ₦2,000 transfers, bank fees, transportation costs, data bundles, and even bigger expenses. The small expenses count as well since they accumulate.
4. Categorize each of your expenses. Use simple categories such as food, transportation, housing, bills, family, debt repayment, savings, and personal expenses.
5. Review your expenses weekly. Add up the amounts for each category and compare with the previous week’s amounts. For instance, if you spent ₦15,000 on food in one week, you will be aware of this amount before spending ₦15,000 the next week.
6. Perform a thorough review after 30 days. Add up the amounts of each category and compare with your monthly income. This is how you will realize where your salary goes each month.
Use this simple tracker:
| Date | What I spent on | Category | Amount |
|---|---|---|---|
| Sept. 1 | Transport to work | Transport | ₦2,000 |
| Sept. 1 | Lunch | Food | ₦3,500 |
| Sept. 2 | Mobile data | Bills | ₦2,000 |
| Sept. 2 | Family transfer | Family | ₦10,000 |
Instead, what you may find is that one big cost is not what’s draining your salary. It could be a number of smaller costs.
To learn about a more advanced method of budgeting, you should see How to Track Your Spending.
After you know how you spend your money, you will be able to make a realistic budget.
Create a Salary Budget That Fits Your Life
Since you already have an idea of where your money ends up going, you can now make a realistic budget.
A budget is just a plan for your money. It is something that directs the flow of your money before you actually begin spending it.
The first thing you will do is write down your actual salary. Then you should record all your mandatory expenditures, such as house, food, transport, electricity bills, loan payments, etc.
After that, you should see how much you want to save and how much you need for other expenditures. Whatever money is left is to be spent on discretionary expenses.
How Should You Divide Your Salary?
Perhaps you are familiar with the 50/30/20 ratio where you spend 50% on needs, 30% on wants and 20% on savings and debt servicing. This can be a good starting point, but you don’t have to make yourself follow this rule if it doesn’t suit you.
If you have rent, transportation and food taking up more than half of your monthly income, ignoring that will not help your budget.
Rather, you should apply your figures. For instance, if you earn ₦200,000 every month, you could make a budget such as this:
| Category | Amount |
|---|---|
| Rent provision | ₦40,000 |
| Food | ₦35,000 |
| Transport | ₦25,000 |
| Bills and data | ₦15,000 |
| Family support | ₦15,000 |
| Savings | ₦30,000 |
| Personal spending | ₦20,000 |
| Miscelleanous | ₦20,000 |
| Total | ₦200,000 |
In this case, the rent provision refers to the practice of saving a certain amount of money every month to cover your upcoming rent payments. For instance, if your annual rent payment amounts to ₦480,000, you can save ₦40,000 per month during twelve months.
The above figures only serve as an illustration. Your personal statistics can look quite differently depending on where you live, your obligations and your income.
Your salary budget needs to answer three main questions:
- What do I have to pay?
- How much do I need to save?
- What can I afford to spend?
The sum of all your estimated expenses should not exceed the figure of your monthly salary.
A perfect budget does not exist. The one which you can stick to is considered the best one.
How to Divide a ₦250,000 Monthly Salary
Budgeting becomes easy when you learn from an example using numbers.
Let’s say that your monthly salary after deductions is ₦250,000. Your first step will be:
| Category | Amount |
|---|---|
| Rent provision | ₦50,000 |
| Food and groceries | ₦45,000 |
| Transport | ₦30,000 |
| Utilities and data | ₦20,000 |
| Family support | ₦20,000 |
| Savings | ₦30,000 |
| Personal spending | ₦15,000 |
| Miscellaneous buffer | ₦40,000 |
| Total | ₦250,000 |
These figures serve as examples. It could be totally different in your case, according to the place you live, your rent payment, family obligations and expenses.
In case the rent costs more for you, then you will have to either cut down some money from flexible expenses or somehow decrease the amount of money you spend for housing. If you have to spend more on food, then simply make changes in your budget, instead of lying about how much you spend.
What If You Earn Only ₦150,000?
The same logic works here. Only you have less space for maneuvering.
You may have to share your dwelling place, cut down on your expenses or earn more.
Your objective is not to reproduce somebody else’s ratios. Your objective is to fit your salary to your lifestyle.
Give Every Naira a Job on Payday
The salary budget might be well designed, but it may fail miserably if you assume that everything you have in your account is disposable cash.
As soon as the salary is deposited into your account, assign a role to each portion of it immediately.
First, transfer the amount for savings from your spending account. Next, keep money for all those expenses that will come up in future. This is all disposable income left now.
What Should You Do When Your Salary Enters?
You may apply the following payday system:
- Check how much money you received.
- Save money on your future rent and other expenses.
- Save your planned saving money.
- Split your variable funds into weekly amounts.
- Save your funds for your bills, debts and obligations to your family.
- Do not touch your reserve fund unless you really need it.
You may use different bank accounts, funds, envelopes, or even an ordinary table in Excel to separate the money according to these categories.
The point here is obvious; your bank account will not show you how much money you have to spend. Your budget does.
This little trick will help you manage your salary much easier since now you will not think about how to allocate your money each time you want to spend it.
Also, you can automatically invest a part of your savings by buying shares of profitable companies. I do that.
How to Stop Spending Your Salary Too Quickly
In some cases, your salary does not vanish because of one significant expenditure. The salary vanishes because of several small decisions made throughout the month.
A couple of meals purchased rather than preparing them yourself. Additional travel as a result of leaving late from home. Some subscriptions that you hardly ever use. Shopping impulsively simply because there is money in your bank account.
Individually, none of these expenditures seem to be too important. But together, they may take a considerable portion of your salary.
What Should You Cut First?
Begin by reducing unnecessary costs that occur on a regular basis.
Consider your subscriptions and unsubscribe from those you never use. Limit how much you spend dining out, on entertainment, and on shopping. If you want something which is not really necessary, then hold off on making the purchase for 24 to 48 hours.
Instead of using your whole monthly budget at once, consider limiting your spending each week. This way, you are less likely to go through most of your flexible budget in the first two weeks of the month.
However, do not fall into the trap of eliminating everything enjoyable. You should not set up a budget that will leave you dissatisfied all the time.
The point is not to stop spending. The point is to ensure that your spending aligns with what you value.
How to Prepare for Rent, Repairs, and Unexpected Bills
One of the reasons why managing salaries is made difficult by the fact that there are some expenses which don’t occur on a monthly basis.
It could be your rent for the year, a problem with your car, a problem with your laptop or a medical bill that comes up.
The bills may not necessarily be emergencies; most of them are just unexpected expenses.
How Do Sinking Funds Work?
Sinking fund is the practice of putting aside small sums on a regular basis towards a future anticipated expense.
For instance, if you pay rent yearly worth ₦240,000, you would be able to set aside ₦20,000 per month over 12 months. On the day rent is due, you will have saved the money and not try to raise ₦240,000 all of a sudden.
Same practice applies to car maintenance, insurance policies, yearly subscriptions, school payments or other payments that you are aware of.
Keep the savings out of the money you use for daily expenses so that you do not end up spending them.
You also need to create an emergency fund to cater for expenses that you cannot predict. You need to start small based on what you can manage and keep building it as your income grows.
The bottom line is just making sure that you no longer suffer unexpected expenses.
How to Manage Salary When Family Needs Money
To many Nigerian salaried workers, financial assistance to their families may not be considered an optional expenditure. Your parents, brothers, sisters, and other relations may rely on you for finance.
This becomes problematic in a situation where all requests become emergencies, and you continue to spend money that your budget cannot sustain.
In the case where you provide regular support to family members, factor it into your monthly budget. For instance, if you know you have been sending ₦20,000 home every month, consider the ₦20,000 to be part of your expenditure.
It is also advisable that you make decisions on what you can afford before making such requests. In this way, it will be easy to tell someone, “This is what I can afford for this month,” instead of spending more than you can afford.
Financially independent people can assist others easily without compromising their financial independence.
How to Manage Salary When You Have Debt
Also, debt should feature in your budget for your salary.
Write down your debts, their minimum payments, and any interest charged. Budget in all these payments in your monthly budget.
Do not incur new debt to finance your normal spending. If you have money left after meeting your necessary spending and saving, use that to pay expensive debts.
However, if your debt payments are almost all your salary, budgeting may not be the solution. You may have to cut down on large expenses, renegotiate your debts, or earn more money.
What If Your Salary Is Not Enough for Your Expenses?
However, even if you manage to track every naira you earn, curb any wastage and find that your pay just does not meet up with your basic expenses, that need not be a problem with budgeting.
It might be an income issue.
When your necessities take up all of your salary, reducing another little subscription will not solve anything.
What Can You Do When Your Salary Is Not Enough?
Begin by examining your major expenditures.
Is it possible to decrease your cost of living? Is it possible to cut down your transportation expenses? Is it possible for you to refinance your debts? Is it possible for you to decrease your obligations which have become too expensive for you?
Next, examine your sources of income. Are there skills which you could earn money from? Is there a possibility of doing freelancing jobs or getting additional sources of income? Can you ask for more compensation or shift to better paying positions?
You may also need to reconsider some of your obligations.
What Should You Avoid?
Do not take out costly short-term loans merely to afford living a lifestyle that your income does not permit you to lead. Lending will help you cope with one challenging month but will make next month even more challenging.
The budget won’t conjure up any money for you. It just helps you to clearly assess the difference between what you earn and what you spend.
How to Know If Your Salary Management Is Working
You don’t need a flawless budget. You need a budget that improves itself.
At the end of each month, take a few minutes to evaluate how your planning compares with reality.
- Did I know where my salary was going?
- Did I save as much as I planned to?
- Was there enough for my essentials?
- Was I avoiding unnecessary borrowing?
- Have I made progress towards paying the upcoming expenses such as rent?
- Have I spent too much in any specific expense category?
- Have I had to pay something with the funds earmarked for another expense?
If you notice that you regularly overspend on food, transport or personal expenses, change the budget rather than repeating the same mistakes next month.
You should also evaluate the progress over the period of several months. Are my savings increasing? Are my debts getting smaller? Is it becoming easier to cover the upcoming expenses? Do I have less and less financial crises at the end of the month?
This is how effective salary management works.
You’re not trying to micromanage your naira forever. You are developing a system that helps you make better decisions about your finances month after month.
Give Your Salary a Plan
Even though you are getting paid well, the money might not be sufficient to meet all your desires. Nevertheless, it is important to understand how the money received should be spent.
Once your salary comes in, you cannot wait for the end of the month to try and see how much you have spent on different activities. You will start with your take home pay and track your expenses. Prepare an attainable budget. Put money aside for future expenses. Save any money possible and budget for your family’s obligations.
Finally, look at the figures and change your budget according to your new circumstances.
In some cases, you will realize that the main problem is not spending but rather lack of sufficient income to meet your current obligations. If so, then the budget has served its purpose since you have realized the problem.
You can learn a practical step by step guide on how to find a job in Nigeria.
Before the arrival of your salary, take a little time and prepare an estimate of your income. Afterward, allocate what you think you should use in the particular ways.
Your salary cannot remain a mystery for you to try and unravel at the end of each month. Plan your money beforehand.