By Neli Mbara
Budgeting is the most important thing you can do to manage your money - you need to treat budgeting as a form of self-care. For many people the end of the year and the start of a new one is a time to reflect on their spending and income over the year. Even though this may have been a year where some financial goals were not met as it was a financially straining year for most, it is still a good idea to review your current financial position and consider investing your time in budgeting for the future, if you haven’t done so already.
What is a budget and what’s the point of having one?
A budget is simply where you identify your income and expenses and decide if you need to pay off some debt or can afford to save and how much.
The point of having a budget is to take control of your finances, to avoid being ‘caught out’ by an unexpected bill or finding that you cannot afford to do some of the things that you want to do. If you have debt, having a budget to help pay them off, puts you in control, manages your credit score and gives you a better understanding of your disposal income after all expenses.
How much detail do I need?
You need to find out what works for you. Some people simply have an idea in their head of what they can afford to do each month. Other people like to itemise everything on a spreadsheet and go through it regularly. What matters is that you take note of what you earn and what you spend and monitor it so that you know whether you are on track or need to amend your budgeting and spend.
Earning and spending
You probably have a clear understanding of the amount you earn, whether by working, or rent from a property, or income on your investments. What may be a little fuzzy is the amount you spend. During lockdown there has been increased spending online and it’s so easy to press the ‘buy now’ button, especially if things are not going well. Ideally you need to consider what you generally spend in an average month, and plan for expenditure that happens less regularly but is still part of your essential living costs such as a car service.
If you can’t remember, look back over the past 12 months – or the last 2 or 3 months of bank statements – to see where your money is going each month. Are you paying for subscriptions you don’t need any more? Companies nowadays won’t contact you with a better deal; unfortunately, you have to ‘shop around’. However, you could make significant savings on your insurance, mobile phone contract, streaming services or club memberships.
Debt
You can budget to pay off a small amount of your debts at first and as you see the amount falling, you may be able to pay more until finally it is paid off.
Sometimes people find it difficult to work out whether you should pay off more debt or save for your future, as well as which debt to pay off first. This is again where you need to get advice to help you plan your approach because everyone is different and has their own expectations.
Emergency fund
When you have worked out your income and average spending, you can see if your income is generally more than your expenses. If it is, then make sure you set aside some money in an emergency fund in the event of unexpected expenses. This varies depending on your situation, but it is generally advised to save three to six months of income. This helps avoid a crisis if you receive an unexpected bill or expense in the short term or if you suddenly lose your job and need to cover your essential expenditure while looking for another job.
Save for your future
Once your emergency fund is taken care of, you can decide how much to save for the longer term. Setting money aside now for you to spend later is sound financial planning. The power of compounding (where the interest you earn on the money you have itself earns interest) will propel your savings even higher once you get going.
You may have a specific goal you are saving for such as a holiday (remember those?) or university expenses, or it may be putting a monthly amount away for your retirement. If you’re already retired, you might be thinking about your living or medical expenses, and the costs of a care home. Saving early will have a significant impact on the amount you have later, so even putting a small amount aside each month will build up into a tidy sum if left alone to grow.
This is where you should seek advice from a certified financial adviser to ensure that you plan and save in the right product with the right level of risk that will help you meet your saving objectives.
A sustainable habit
Carrying out a review of your finances is the first step. Sometimes the harder part is keeping up a good habit. There are hundreds of articles online with great tips and hints and a range of apps available that will help with budgeting. Some help you to create a spreadsheet, some bank apps will round up your spending so that rands go into a savings account automatically, and others will track your spending and show you where your money is going. Anything you can do to save will help build up your funds over time.
Neli Mbara is a Certified Financial Planner at Alexander Forbes
PERSONAL FINANCE