The things in life that are truly good for you are rarely smothered in melted
cheese or chocolate. That is why budgeting is to your financial health what
low GI bran food is to your physical wellbeing… Dry and rather boring but
future you will thank you for it.
So if our top five rewards of living with a budget inspired you to take action,
this post is for you. In seven easy steps we want to help you create a budget
that will not only help you get a bird’s-eye view of your financial situation but
also assist you in making more clever choices going forward.
STEP 1: PREPARE
A budget is all about facts and therefore you will need all the recent monthly
statements and slips you can get your hands on.
Also get a black, red and blue pen, a pencil, highlighters, a calculator, an
exam pad and everything else you think you might need. You can write your
budget down on paper or use a computer programme. This is your budget,
work with the method you prefer.
Now examine your statements and slips. Use your pens and markers to
highlight and identify each expense.
STEP 2: CALCULATE YOUR MONTHLY INCOME
Write down the amount of money you receive every month. Your salary and
any extra money you might earn from freelance work, child support, a part-
time job etc.
If this amount fluctuates every month, work out what the lowest feasible
average is and use that.
Important: Should you earn more than your lowest feasible average in any
given month, it is essential to put the difference away in a savings, just to be
safe.
STEP 3: RECORD WHERE YOUR MONEY IS GOING
On your exam pad, or on an Excel spreadsheet, create two main columns,
“Spending” and “Saving”.
Under the “Spending” section list the things you spend your money on starting
with all the fixed expenses like home, car instalment, insurance, medical aid
etc. and add each of their totals.
Then list all the totals of all your variable expenses like petrol, water and
lights, food, clothing, entertainment etc. and add each of their totals.
Tip: While you complete this step, make stars next to the areas where you
think you will be able to cut back on.
After you have listed all your spending, turn to your saving column and list all
the money you are currently putting away every month.
If you don’t have any savings yet, don’t be alarmed. That is exactly the reason
why you are creating this budget.
Remember: Your “Saving” column is far more than just the money you are
able to put into a Savings Account every month. It forms part of the greater
financial goals you have set for yourself and requires a proper savings plan.
STEP 4: DO THE MATH
Now that you have all your monthly expenses listed, it’s time to do the math.
Tally up both columns and add them together.
Now, subtract this amount from the amount you indicated as your lowest
feasible income.
What do you have left? A little? Nothing? Did you go into negative digits?
Every month brings with it a series of unforeseen expenses and that is why
the amount you are left with every month after all your spending and your
saving have been accounted for should be more or less 10% of your income.
This will prevent you from living from payday to payday and allow you some
wriggle room.
TIP: Should you reach a new payday with money left over from the previous,
you don’t have to spend it. Put it in your savings and reach one of your short-
or medium-term goals that much sooner.
STEP 5: WHERE CAN YOU CUT BACK?
There is always room to cut back on your expenses, even if your balance in
Step 4 looked good.
Revisit your “Spending” column and look at all the areas you have added
stars to. What is the realistic amount you can cut back on each of these?
Could you perhaps stop a specific purchase altogether i.e acrylic nails, your
daily take-away coffee? Amend the totals you are able to bring down.
Now look at the other areas. Are there any luxuries camouflaged as
necessities i.e. satellite television, cute but expensive clothing for your
toddler?
If you don’t have any money left after all your expenses have been paid, or
you are overspending every month, you have no choice but to start cutting
back drastically.
Tip: A handy tip when looking to cut back is to multiply a specific monthly
expenditure by 12 and see what your annual spend on it is. A monthly R250
on a nice-to-have item hardly sounds indulgent, but how does R3 000 per
year sound?
STEP 6: RE-CALCULATE
Amend your budget according to the cut backs you were able to make in Step
5 and re-calculate.
How much do you have left now? Keep going back and forth between Step 5
and Step 6 until you reach a point where you can put something into a
savings plan while still leaving more or less 10% of your income in your
cheque account.
Congratulations you are now the owner of a budget! Print your budget out or
make several copies of the hard copy.
STEP 7: KEEP IT CLOSE AND CHECK-IN REGULARLY
Although a budget is your go-to guide when making any purchase
whatsoever, it is never a completed project. And it shouldn’t be. The moment
you earn additional income or have paid off one of your instalments, the first
thing you have to do is amend your budget to tell this extra amount where you
want it to go.
The same goes for any unforeseen expenses or emergencies that may have
depleted your account and forced you to take money out of your savings or
credit card. The moment this happens you have to go back to the drawing
board and adapt you budget so you can make up for this hiccup.
Next time we will look at the various warning signs indicating that financial
distress may lie ahead.
