In my 20 years in the financial industry I have seen that our clients who are fully aware of their income and expenses experience the least stress and have the most savings. It is imperative to keep a monthly – and even an annual – budget.
An up-to-date budget helps you to:
· Keep an eye on your goals;
· Ensures that you do not spend more than you can afford;
· Plan for retirement;
· Plan for unforeseen expenses;
· See where you might be wasting money every month.
It is important to include every possible expense in your budget. I often notice that when I go through clients’ budgets with them, they exclude expenses such as spending money, food or fuel, as they feel that those things have to be paid from what is left over after the rest of their fixed expenses have been paid. The danger of this is that you do not get a real picture of what your expenses are. It is also one of the main reasons that people have credit card debt, using credit to purchase food and even clothing.
Where to start
Setting up a budget does not have to be complicated. Initially, it will take some time to put all your expenses together, but after that it just gets easier. It is good to have a budget for 12 months in advance. A neat budget empowers you and gives you control over your finances. I enjoy balancing our business budget monthly as well as my personal budget. And there are several budget software apps out there to help. Personally, I use a simple personalised budget sheet that I have put together on MS Excel, which allows me to update with any changes and is able to automatically calculate everything for me. Once you start a budget, you will feel so much more in control of your finances.
How do you check a budget?
If a budget is set up correctly from the start, it is easy and quick to update the figures at the end of each month. Check your bank statements on the day that your debit orders come off and enter the exact figures paid and make sure that the net salary indicated on your salary slip has been paid into your account. After all debit orders and payments have been made, the amount left in your bank account should balance with your other expenses such as fuel, food and leisure activities, that still need to be paid for throughout the month. We tend to think that we will save what is left after all our expenses have been paid but saving should be part of your monthly budget.
What if you can’t remain in budget?
There is a basic principle that says ‘if your budget is not right, you need to increase your income or reduce your expenses’. It’s as simple as that. We tend to have a hard time giving up lifestyle expenses like expensive homes, cars, vacations or eating out, because we feel it is these expenses that give us status. I want to challenge everyone out there to make the hard decision to scale down on lifestyle expenses if your budget does not fit. You may only have to do this for a short time until your income increases or until you can reduce some of your other expenses.
Do not buy things that you cannot afford. We all tend to want to ‘keep up with the Joneses’. There’s often that colleague at work or a family member, or even a friend, who we would like to impress. That kind of competition never ends well, and someone always gets financially hurt. If you’re in that kind of situation right now, just stop for a minute and think about why you want to impress people.
These are my tips for a healthy budget:
· Draw up a budget as soon as possible and check it monthly.
· Try to pay all your debit orders on the same day. This will prevent you from forgetting about any expenses.
· Use the correct amounts in your budget. Do not estimate.
· Check your bank statements every month and confirm the expenses against your budget. You will be surprised to see that sometimes fees are adjusted without your knowledge, for example bank charges.
· Be aware of when your monthly debit orders have their annual increases and record them in your budget.
· Plan for the unforeseen. Open a money market account (emergency fund) at your bank and place an amount in the account every month for unforeseen expenses.
· Save monthly for your annual vacations.
· Your retirement provision must be part of your monthly budget and must be at least 15% of your salary in addition to your work pension fund.
· Saving for retirement takes precedence over lifestyle expenses such as homes, cars and vacations. You want to ensure that you can maintain the lifestyle you are living now when you retire.
· Your provision for your family in the form of life insurance, disability cover and dreaded illness cover must be at least 10% of your income.
· Short-term debt like credit cards, bank loans and clothing bills are your enemy. If you cannot buy it in cash, you cannot afford it.
· Be aware of where in your budget you are wasting monthly. A family’s expense on cars should not be more than their home installment.
· Use a little money to help others, if you can – and create a fixed monthly expense for this. It brings a lot of joy to help others.
· Plan ahead for one-time expenses that you are aware of for the year to come. This will help you to cutdown on other items to make provision for it.
· Get a healthy balance between living now (lifestyle), paying off debt and saving for retirement.
Financial freedom is not about how much you earn but rather about how you spend what you earn. Make good financial decisions now. Your financial future is in your hands.