Entrepreneurship

Topic Area:Financial information and decision making

Sub-topic area: Managing finances: Budgeting

Key unit competence: To be able to prepare a personal budget

Review activity 

Do you recall working with budgets in Senior 1? Why is it important to manage your money well?

Introductory activity 

Ngoga is a young man. Last month he found a good job in Kigali. Now he has moved from his family home to the city. On the weekends, Ngoga likes to go out with a friend to the cinema. He also goes to concerts where local bands play. He dreams of buying a car. When Ngoga lived with his family, he did not need to pay rent. Now he is renting an apartment in the city

Discuss the following: 

1. List Ngoga’s wants and needs. 

2. Make suggestions to Ngoga on how he can manage his money to satisfy his wants and needs.

 3. Do you think it is important to prepare a budget?

6.1 What is a budget?

 You can plan how to spend the money that you make. This spending plan is called a budget. A budget shows how much money you are likely to earn. It also shows how you plan to spend the money. It is a useful tool that can help you decide how to manage your money.

The importance of a budget

 With a budget, you know ahead of time if you will have enough money to buy the things you need. Also, if you have enough money to do the things you want to do. If you do not have enough money to do everything that you would like to do, then a budget can help you to decide which things are the most important. A budget can also help you to see which expenses you should cut down on. A budget can show you how much money you can spend. When you follow a budget, you can keep out of debt.

Case study 6.1

Budgeting and our future As a young woman, Mukundwa dreamt of running her own tour company. After checking the cost of the van she wanted and looking at her salary, she drew up a budget. Then she started saving. After 3 years, with her savings and a small loan from the bank, her dream came true. Mukundwa bought her first 12 seater safari vehicle. Today Amahoro Tours transports tourists throughout Rwanda.

Questions 

1. What are the elements of a budget? Explain how to draw up a budget.

 2. Why do you think that it was important for Mukundwa to draw up a budget?

 3. What should Mukundwa do if she found that her expenses were greater than his income?

 4. While Mukundwa was saving up to start her business, she still needed to pay for daily expenses such as food and rent. She therefore drew up a personal budget. What is the difference between a personal budget and a budget for a business?

Case study 6.2

 Read the case study and answer the questions that follow.

 Presenting the national budget 

There are many different kinds of budgets. Every year, the Rwandan Minister for Finance and Economic Planning makes a presentation at a session in parliament in Kigali. In this speech, the Minister announces the amount of taxes the government expects to raise. The Minister also explains what the Rwandan government plans to spend the money on. The government’s budget is called the national budget. It is published on the finance ministry website.

Questions 

1. How does the Rwandan government announce the national budget? 

2. The income for the national budget comes from taxes that are paid by people in a country. How do you think the Rwandan government knows how much tax will be raised next year? 

3. One of the government’s priorities in 2015 was rural development. Expenses for improving land use and reducing poverty was 252 Frw billion. This was 14% of the budget. 

a) Explain how a budget can help the government decide what to spend money on. 

b) Rural development, promoting export, youth development and other programmes were allocated 52% of the budget. How do you know that these were priority programmes?

Activity 6.1 

1. Why is it important to have a personal budget? 

2. Discuss the similarities and difference between a personal budget, a business budget and a national budget.

The role of a personal budget A personal budget is a tool that can help you: 

• use your personal resources effectively 

• to make personal decisions 

• to minimise financial risks

 • understand your spending habits 

• to build a savings account

 • to maintain a good credit rating.

Budgeting and decision 

making Budgeting can help you to use your resources effectively. When you see how much things cost, then you can make important decisions. For example, if you spend too much money on food, you can save by buying less soft drinks. You could also eat out less. If transport is too expensive, you could perhaps use a bicycle to get to work.

Step 2 

A full circle has 360 degrees. To find the number of degrees for each sector, multiply the percentage by 360.

Exercise 6.1 

List the monthly expenses in your household. Draw up a pie chart of your expenses.

Activity 6.2

 Write a mind map on the board where you list the importance of budgeting in daily life.

6.3 Elements of a budget

 A budget includes a list of income and expenses for a time period.

6.3.1 Income 

Income can be a salary or wages. A salary is income that is paid every month. Wages are paid weekly. You can also earn income from interest on money in a savings account at the bank. If you rent out part of your home, you earn rent. Students may receive a stipend or bursary at a university or your parents may give you a monthly allowance. Add all your income in a column. This is your total monthly income. List your income for the following months. Your budget can be for six months or a year.

6.3.2 Expenses

 In a personal budget, expenses can include:

 • rent or home loan repayments

 • utilities (gas, electricity and water) 

• rates and taxes

 • home maintenance and repairs 

• food • laundry

 • school uniforms, school books

 • school fees for senior secondary 

• clothes 

• transport 

• insurance 

• medical insurance 

• debt repayments.

Exercise 6.2

 List the income and expenses for your family in a budget. When listing the expenses, first write a list of needs and wants. Then select from this list which expenses are essential (needed) and which are expenses that you can add if you have sufficient (enough) income.

6.4 Steps in preparing a budget 

Follow these steps to prepare a budget: 

Step 1: Record all sources of income in a given time period. 

Step 2: Create a list of expenses for a given time period. 

Step 3: Subtract expenses from income. 

Step 4: Review the budget. 

Step 5: Make adjustments.

 When you subtract the expenses from the income, you will see if there is enough money to pay for all the expenses. If the expenses are higher than your income, you need to make an adjustment. You can try to find another way to earn an income. You can also try to reduce expenses.

Activity 6.3 

Draw up the following budgets. 1. Write a list of sources of income for yourself for a given time period. Then list the expenses. Draw up a personal budget. 

2. Find an idea for a business. Then compile a budget for the business. Show the sources of income and expenses.

Activity 6.4

 Prepare a presentation where you advocate for budget preparation in your community.

Case study 6.4 

Read the case study and answer these questions.

 Drawing up a personal budget 

Ngoga draws up a personal budget. There is no money left over at the end of each month for savings. So he decides to rent out a room to a student at 5 000 Frw per month. He wants to save up to buy a car, so he places the savings in a bank account. The bank pays 10% interest per year. Ngoga fills in the income and expenses in the adjusted budget.

Questions 

1. a) List the steps in compiling a budget.

 b) How did Ngoga adjust his budget?

 c) Ngoga wants to save 100 000 Frw. How long will it take him to save? 

2. List your own income and expenses. Then prepare a personal budget. Review and make adjustments to the budget if needed.

Unit summary 

What is a budget 

• A budget is the plan you draw up to say how you intend to spend your future income.

 • A budget is important, it shows how much money you can save and will help you reach your financial goals.

 • A personal budget is a guess of how much income you will have and how much money you can spend for a specific time period.

The role of a personal budget

 • The role of a personal budget is to use personal resources effectively, to minimise personal financial risk and to make personal decisions relating to your finances. 

• The government’s budget is an estimate of how much taxes they will collect and how much money the government can spend in the country.

Elements of a budget 

• A budget has two elements: potential income and expected expenses. 

• Income is any regular amounts received.

 • Expenses are any amounts that should be paid

Steps in preparing a budget 

• There are five steps to follow when compiling a budget. 

• A budget is a projection thus income and expenses can be adjusted to suite changes in circumstances.

Importances of a budget 

• Ensures that you will always have money for things that you need 

• Will keep you out of debt