What a budget will reveal
Article By: Jillian Howard
www.iafrica.com
Okay, so it’s not exciting and sometimes it’s downright scary to sit down and write up how much you earn and how much you spend, especially if you know you waste money but enjoy doing so, or have debt that is terrifying you.
You don’t have to budget. You can get by (and have so far?) without actually mapping out your monthly cash flow. It’s just that if you want to follow in the footsteps of financially successful people, it all begins with the budget. There’s no way around it. People who do not budget are not in control of their finances, nor of their life aspirations. That may sound a bit harsh, but your dreams and goals need to be paid for and if you plan in order to finance them then they are actually likely to happen.
I recently came across an analogy of the budget where it was compared to a roadmap. You can drive across the country without a roadmap, vaguely knowing where it is that you are travelling to but it tends to take longer to get there and costs more, doesn’t it? People on a tight budget (there’s that word again) always plan their trips because they know they can’t afford a deviation.
The aim of budgeting is to know clearly how much you really earn (the net) and how much you have to spend (living expenses) and how much you couldbe saving. The reason that it’s preferable to do one every month is to discover the following facts (and not just guesses):
Nine situations that a budget reveals
- How much makes it into your bank account every month (which can be averaged if it’s not a regular salary).
- How much all of those little expenses add up to every month (bank charges, gym subscriptions, etc.)
- A stock take on how much your car actually costs you every month (repayments, petrol, repairs, insurance) or, if you have no car, how much transport costs are eating into your earnings
- Similarly, a stock take on how expensive your home is to maintain.
- Where you spend the most money (clothes, eating out, entertaining?)
- Differentiate between fixed expenses and variable expenses.
- How much you are spending on your debt as a percentage of your net income.
- How much you are saving (or not) as a percentage of your income.
- How much spare cash you have at the end of every month.
Why they need revealing
- People get into “over their head” debt because they know what their salary is and forget to reduce it by tax, medical aid, etc. It’s important to know how much is actually paid into your account and work with that. If you have your own business then perhaps take off your annual tax rate from all deposits so that you have an idea of net income.
- You will discover that all of those small amounts deducted automatically from your account add up to a sizeable deduction. I have just done a clean out of my little deductions and I now save R245 per month on services I can live without.
Review your bank charges. Perhaps it would be cheaper to accept one of the package deals on charges that your bank offers. A hundred rand here and a hundred rand there can add up to a reasonable saving. R245 per month is not a lot, but save it for 10 years, compounding the interest/dividends? It’s a holiday or a motorbike or first year varsity fees for your child.
- Are you driving a car that is too expensive for you? It was lovely purchase, a dream come true at the time, but it really costs a lot and has the novelty worn off? Expensive cars also attract pricey insurance. Powerful engines use loads of fuel. Could you look around for a cheaper option that would suit your needs and your pocket?
- Your home is your castle and this is one area where people don’t mind spending a lot of their monthly income. But could you rent out the granny flat if you own your home, or rent somewhere cheaper temporarily? Most people would only consider this option if they really needed to reduce debt or really wanted to save for a dream. But again, be realistic. Are you living in a house that is costing you too much?
- Luxury spending is the hardest to stop. I just love eating out in fine restaurants and it’s the first thing I stop treating myself to in a slow month (I have a variable income). Some ladies have an affinity for shoes or handbags. Some men collect gadgets or DIY tools. When you have spare cash, what’s the first thing that you treat yourself to? Add up how much you spend on nice stuff every month and decide if you really need that more than reducing debt or financing an ambition.
- The reason you differentiate between fixed and variable expenses is because the fixed ones are not negotiable, but the variable ones are.
Keep tabs on how much electricity or cell phone airtime you use and see if there isn’t a way to keep it as low as possible.
- Unavoidable debt is usually the purchase of your home and car. They just cost too much to save up for. But if you are spending a large proportion of your salary on those repayments (plus insurance) then avoid further debt at all costs. Some of you already know that most of your pay is being used to pay off accounts and credit cards on top of your bond and vehicle finance. Living to pay off debt is no way to live. Sometimes just the shock of exactly how much of your income goes towards debt is enough for you to start a debt reduction program.
- This percentage of your salary saved is usually very small, in fact the smallest percentage of salary spend there is. Why is that? Because whatever you save is not giving you any benefit now, only in the future. The only way that you will be urged to save more is if you really, really want something better for yourself ASAP, or out of fear that you may suffer financially in the future if you don’t. Work on your ambitions and make them inspiring to you.
- Some people actually do have spare cash at the end of the month. If you are aware of exactly how much it is then you can plan to do something useful with it. If you don’t have spare cash then go work on your budget until you do.
Now that you know why a budget is needed your next step is to draw up a budget that is effective for your needs, if you are not already doing so.
You guessed it — that’s my next articl
Jillian Howard is a financial coach for smart people. She also coaches financial planners.