Setting a budget and sticking to it is such an important part of life yet surprisingly few people or households actually do it. You would not think of running a business, even a small business without some sort of budget so how would you run your life that way?
A budget, quite simply is a plan of your estimated income and expenses over a period of time. You should have a monthly and an annual budget and perhaps even a more long-term plan if you have specific needs or goals further down the line. You might even need a shorter term budget if you have a certain amount of money left towards the end of the month and you need to get to your next paycheck.
A budget need not be a painful punishing exercise where you deprive yourself of everything. It is simply a guideline and a plan to help you achieve your financial goals, spend more wisely and give you some direction.
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The sad reality is that most people live beyond their means, spend a considerable amount of their income paying interest on debts and do not put anything away for those unforeseen expenses that always come at the worst possible time. Living like this will cause stress in your life and your relationships and prevent you from enjoying the occasional treats and luxuries you could otherwise afford. It could also result in you reaching retirement ill-prepared and having to take a considerable drop in lifestyle as a result of poor planning.
There are a number of elements to include and consider in order to create the perfect personal budget. We highlight the top 10.
1. Understand exactly what your income is
We say personal budget but if you are married, in a long term relationship or a family, than the budget would have to apply to the household in its entirety. It is important that the budget is as accurate as possible.
If you earn a fixed income, it is pretty straightforward to determine the monthly income. Remember to include any annual or quarterly bonuses or other sources of income. You need to work on your net or take-home pay.
If you are self-employed, a commission earner or your income is erratic for any reason, you need to be as realistic and as accurate as possible. Study historical earnings and look at what realistic opportunities you are aware of for the period. Do not let your ego take over and be overly optimistic.
2. Get an accurate idea of all monthly expenses
There are two types of monthly expenses, fixed and variable. Fixed expenses are the same every month such as your bond and car repayments, school fees, insurance policies and so on. Variable expenses go up and down each month and include groceries, entertainment, gifts and clothing. Ensure you allow for all expenses. Some, such as petrol and cellphone accounts could be variable but fairly consistent so could be included under fixed expenses.
3. Budget for the unexpected
As much as you try to include all expenses in the previous step, there will always be those unexpected expenses that crop up from time to time. This could be an expensive car repair or additional medical costs. These are unknown but put some money aside every month for these unforeseen costs.
4. Understand why you are budgeting
There is no point going through this entire exercise if you do not believe in it. Understand that it is a plan to help you better manage your finances to ensure a more positive outcome.
5. Involve all members of the household
If your partner or other members of the household are not on the same page as you with the budget, it is going to be a frustrating and problematic process. Involve them from the start, explain the reasons and work on it together. If there is no buy-in from you partner or other people that form part of the budget, it is only going to lead to problems.
6. Create measurable goals with deadlines
The budget needs to have goals that have a time frame and can be measured. Again, set these with your partner so there is agreement. The goals could be reducing debt, saving for a house deposit, children’s education or an overseas holiday. They could be more basic and simply to get through the year without incurring more debt. Whatever you decide, you now have something tangible to work towards.
7. Decide on a budgeting method
If you are old school, there is nothing wrong with using a pen and paper to design and run your budget. Alternatively you could create an excel spreadsheet to simplify the task or use one of the many free or paid for online packages or smartphone apps. Remember, if there is more than one person involved, the details need to be updated accurately by all involved.
8. Put the budget into action
If you have not worked with a budget regularly, it will take discipline to remember to keep accurate records and update it as often as necessary. There is no point in doing a budget that has missing or incorrect information. You do not have to be pedantic about every last cent as this will become painful but ensure the vast majority of the money is accurately accounted for. Initially this will take a bit of discipline but it will soon become second nature.
9. Review the budget regularly
Although the budget is meant to be as accurate and realistic as possible, it is quite possible you made some mistakes or some aspects have changed during the budget period. If this is the case, you have to review the budget and make the necessary adjustments or changes. There is no point diligently budgeting every month if you know that some aspects are now incorrect.
10. Decide where and how to make changes if necessary
If you see that the budget is not working or not going to achieve the goals you have set, you will need to make some changes. There are certain things you cannot change and some that can only be changed after some time. Others are easier to change immediately.
Look at your income first. Are you in a position to increase the income side of the budget by working extra hours for example or finding a second source of income? You then need to look at expenses. What expenses can you reduce with the least amount of pain and discomfort? If you grab a cup of coffee on the way to work every day, skipping that could save a few hundred rand every month without causing a major upset in your life. You will have to make some changes if the budget does not allow you to achieve your goals.
The sooner you start budgeting, the better. Over time, it will become easier and more accurate and your goals will be easier to reach. Keep looking forward and decide what you want and design a budget to help you get there. Soon, you will wonder how you managed before without a budget.