MONEY: How do I budget?

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.

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.

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