What a budget really means is spending less than you earn and saving the balance. Most of us think we know the state of our finances, but right now can you say exactly how much do you spend each month? But it would take less than an hour to draw up a budget – this is how:
The one hour budget plan
- Log onto your internet banking or grab your latest bank statement
- Place a blank “to do” list next to you
- Take your bank statement and see what your net monthly income is (what actually hits your bank account)
- Deduct your fixed monthly expenses which will probably be debit orders. This will include items like your bond repayments or rent, levies, car repayments, municipal accounts, phone bills, insurances, gym memberships and medical aid contributions. If this becomes a very long list, note the items that are not essential needs.
- To do list action 1: Stop these non-essential items
- To do list action 2: Review insurance. For short-term insurance this can be done by phone. For long-term insurance, see if you can rather increase your group life cover (if you have it through your employer) as this should be a bit cheaper. You will need to see a properly qualified financial adviser for guidance on this.
- Look at your day-to-day expenses, largely paid on the debit or credit card. This is where the wheels come off for most of us. Items like petrol, clothing, groceries, cash withdrawals and recreation items are where you can make the most radical difference to your wealth building strategy.
- Work out which of them are need-driven and which are want-driven and see what the need-driven items cost you.
- To do list action 3: Find cheaper ways to meet the “needs”. Buying in bulk, going to different shops, paying in advance or joining a lift club are examples of what can be done to accomplish this.
- Consider taking what you manage to save on your “needs” and spoil yourself with something from the ‘wants’ list. If you can afford to, set aside a small amount for one other ‘want’ per month.
- Whatever is left, must be saved.
- Plan for big events: Part of the money you are saving each month can go towards major expenses that you will be facing this year. On your to-do list write down these expenses which can include school fees, holidays, car repairs.
- Work out from your budget how you will fund these expenses. Rather have the money saved upfront than going into debt.
- Start a safety net. It may take a few years to get there but you should have on average 3 month’s salary saved in a money market account. This money is an emergency fund in case you suddenly find yourself out of work or have a major unexpected expense.
- Rework your debt: If you need to find more money to meet savings needs, odds are that your debt is eating up most of your savings capacity. Talk to your banker about what you can do about this. If this fails, fight the urge to upgrade your car or house when the next cycle comes around.
Use the free online budget tool provided by Softline Pastel. InCheck manages your transactions and track your finances. You can just register on www.pastelincheck.co.za. There are no hidden clauses of catches. There is also no technical and banking jargon and the process to classify, analyse and track income and expenses is easy to understand. Simple graphs can be used to track your budget and spending over time. Also, being online means no software installation or ongoing maintenance, backups and upgrades.
Nedbank offers its customers a personal money manager tool and FNB will soon be adding a budgeting tool to its banking app
The 25/35/35 budget rule
If you are struggling to break even every month, this is an easy way to see where you are overspending. If you are spending more than the recommended amount on any of these categories, that is where you need to cut back:
- 35% on household Expenditure: This includes spending on domestic wages, food, communications, entertainment, security, travelling costs, water and electricity.
- 25% of Financial Services: This is how much you should be spending on long term life assurance products, short-term insurance, medical aid, pension contributions and towards longer term savings.
- 35% on Debt Repayments: This includes your mortgage (or rental), car repayments, credit cards and store cards. When taking out a mortgage, make sure your repayments are not more than 23% of your income
- 5% on emergencies: this is money allocated specifically for emergencies and not long term savings.
What most people will find is that debt is the biggest culprit. Paul Slot Director of personal finance wellbeing and debt counselling specialists Octogen, says most households spend around 47% on debt repayments. The 12% difference between what one should spend on debt and what households actually are spending, comes from the savings category. On average households only invest around 15% into financial services. Octogen offers a quick budget estimate: by simply dialling 082 236 0025 and keying in the answers to four questions, a budget estimate is sent to you by SMS.