How much money do you think you could save every month if you just changed your spending habits? Changing your spending behaviour can have a dramatic impact on your financial situation, especially if you’re on a tight budget. How should you manage your finances and prioritize your monthly expenses?
Prioritizing your monthly expenses comes down to a simple economic theory called “opportunity cost”.
Opportunity cost takes into consideration the cost of something if you spent your money on X instead of Y.
For example, you have R1,000 just sitting there in your bank account. Now you have a choice to either spend that money on something you want right now, or you could pay off your debt.
Spending that money right now knowing that you have debt, means that you’ll take longer to pay off your debt.
If you used that money to pay off your debt, you would become debt-free sooner than you expected.
It’s up to you to decide which is more important.
How should you prioritize your monthly expenses?
Make a list of all your expenses
If you don’t know which bills to pay first, make a list of all your monthly expenses.
Start by listing all your monthly bills and their amounts. Don’t worry about listing them in a specific order just yet.
Your monthly expenses may include:
- Mortgage/rent
- Utilities
- Food
- Transportation
- Debt repayments
- Medical expenses
- Childcare
- Insurance (medical aid, car insurance etc.)
- Phone bills
- Clothing
- Savings
- Retirement
- Entertainment
Identify the important expenses
Now that you have a list of all your expenses, you’ll have to figure out which of these you’ll need to pay first.
Shelter, water, fire, and food
Take care of your basic survival needs before anything else.
This includes basic needs like shelter, electricity, and food.
This may include the following:
- Rent/mortgage
- Utility budget
- Monthly food expenses
Paying off your rent/mortgage is your most important expense so that you always have a roof over your head.
Next, you’ll want to make sure you pay your utilities and have enough money left over for a decent food budget.
Try to keep these expenses as low as possible. You don’t need to live in the most expensive area or buy all your groceries from Woolworths. Try to cut down on some of these expenses if possible.
Golden rule: Pay off your debt
Once you have your basic needs covered, the no.1 rule is to prioritize your debt. You want to be debt-free as soon as possible.
You may have several debt accounts and every debt account will impact your financial situation differently.
While paying off all your debt and becoming debt-free is essential, it is important to know which debt accounts to tackle first.
The best way to get rid of debt is by using a debt repayment strategy.
There are a few strategies that you could use, we recommend using the Debt Snowball method or the Debt Avalanche method.
Debt snowball method
The debt snowball method takes into account the total debt amount and avoids interest rates.
By focusing your attention on the loan amount you’ll change your spending behaviour and work with your money differently.
This strategy focuses your attention on paying off your debt accounts one at a time, instead of trying to pay off everything at once.
Once you’ve eliminated one debt account you move on to the next account.
How to use the debt snowball method?
List all your debt accounts from the lowest debt amount to the highest debt amount. You want to pay the minimum repayment on all your debt accounts. And add any extra money you have towards the lowest debt amount.
Once that debt amount is paid off, you transfer that repayment amount over to the next debt account on the list. Repeat this process until you’re debt-free.
In the example below, we have an extra R1 000 we can use to pay off your debt. Which makes the first snowball amount R1 496.
Learn how to get out of debt by using the debt snowball method.
Debt Avalanche method
The debt avalanche method is the complete opposite of the debt snowball method. This strategy looks at the interest rates of your debt accounts and ignores the debt amounts.
The purpose of this strategy is to save money by getting rid of the interest rate.
Although this method may save you money, it is more difficult to stick with this strategy because it takes time. The progress will be slow, so you must remain patient.
This strategy aims to pay off your debt account with the highest interest rate first. Once you’ve paid off that account you move on to the next highest interest-bearing debt account.
You repeat this process until you’re debt-free.
Because you’re getting rid of the interest you’ll be saving money over time. Especially if you’re paying the minimum repayment on all your other debt accounts.
Learn more about the debt avalanche method.
Build an emergency fund
If you do have an emergency fund, you’re off to a great start. If you don’t have one, don’t worry. We all have to start somewhere.
An emergency fund will be your saving grace when you have unexpected expenses to pay.
Start your emergency fund with a specific goal in mind. Ideally, you’ll want to save at least 3 to 6 months of your salary.
So if you’re earning R10,000 per month, your emergency fund should be at least R30,000 to R60,000.
This will help you cover any unexpected expense that may come your way.
Check out this article to help you get started with your emergency fund.
Additional expenses
Now that you know how much you’re paying towards all your important expenses; you can start prioritizing all the fun expenses.
Make a list off all you’re the extra expenses you have for the month and decide which of these payments are more important.
If you want to cut costs, then you may need to reduce or eliminate some of these expenses. You may also find that you may be overspending in some of these items.
For example, how much are you spending on your cell phone bill? Would you be able to reduce this amount by opting in for a cheaper contract or phone?
If you want to learn how to budget properly read our blog post How to Budget Monthly, we’ve included a free budgeting template if you need one.
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