By Tokiso Nthebe
Every month end, many households are often stressed trying to stretch their monthly income to cover all the expenses. With the cost of living on the rise and financial resources limited, this can become extremely overwhelming. More worrying are the households operating without a plan (commonly known as a budget) on how to manage and prioritize their monthly spending.
In the last few months, I’ve heard people complain that they get to the next payday with no money left, while others struggle to account for how they spent their monthly income. Yes, they actually do not know what they did with the money. The truth is “If you fail to budget, you plan to fail.”
The Oxford Dictionary defines a budget as an estimate of income and expenditure for a set period of time; where income is money received for example a salary, rental income or interest and expenses are any costs incurred such as rent, water and electricity. A budget can be prepared on monthly or annual basis depending on the household. Preparing a budget helps households track, determine and monitor their spending habits. This allows them to prioritize important expenses and also to identify areas of overspending (South African Financial Planning Handbook, 2008).
Furthermore, preparing a budget can help families align their financial goals and expectations, determine if they have enough money available to cover their needs and identify financial problems early on. The challenge however, is that households do not budget and those that do budget do so ineffectively; often understating their monthly commitments and/or living beyond their financial means. This usually happens when the monthly expenses exceed the household income and results in using short term debt to bridge the shortfall/gap.
A budget is therefore the foundation of the financial planning process (South African Financial Planning Handbook, 2008). This means that without a budget, it is hard to determine your saving goals, risk management, investment and retirement planning needs. It all starts with a budget!
So how can you budget effectively?
Determine your sources of income
The first step in preparing your household budget is to determine all your sources of income. This includes income received from employment activities (including your spouse’s income if married), interest income if you have investments or rental income if you own rental property. Additionally, if you receive income from business activities or other side hustles this income should also be included here.
Identify ALL your expenses
The second step is to add up ALL the expenses incurred by the household. Expenses include things such as monthly savings or contributions to Stokvels, loan installment, groceries, transportation, water and electricity and entertainment to name a few. Expenses can also be categorized into fixed and variable expenses. Fixed expenses are those expenses that remain the same every month and are paid on a regular basis for example your mortgage bond/ rental expense. Variable expenses are those costs that are change and/or fluctuate every month, becoming harder to budget for. An example of a variable expense can be your entertainment, clothing expenses. Furthermore, expenses can be categorized between needs and wants. It is therefore important to differentiate and prioritize the expenses and to do away with “I want to need it”.
Compare income and expenses and review regularly
The third step is to compare your total income vs. your total expenses. This is important because it helps you determine if you have a surplus or deficit. If you have a surplus, you can use the additional funds available to increase your savings or investments or use the money to pay off debt by increasing your installment (speak to your financial planner about the best strategy for you). Alternatively, in cases where you have a deficit, you can prioritize expenses deemed important and cut down those expenses that are wants or “nice to have”. Lastly, it is important to compare the budget against the actual income received and actual expenses. Determine where a variance occurred and understand why. If you need to change your strategy, do so with the help of your financial planner. Lastly, monitor and review your budget as regularly as you can; change and adjust if you need to.
In the era of the digitalization, it is important to embrace technology to better manage your personal finances and track spending. There are a lot of Applications available that can help you manage your finances by removing the manual burden of tracking your spending for example 22seven, Moneysmart, MyMoney, MyFinancial Life and Money Manager to name a few. These Apps give you an overview of your financial position, where and how you are spending your money and provides recommendations. An alternative for the people who have a phobia for technology is to use the traditional pen and paper or use Excel spreadsheets to prepare your budget and track your spending. Below is a simple template you can consider using.
Preparing a budget is often perceived a mammoth task, that requires you to spend long hours doing a lot of administrative work. As a result, a lot of people do not like budgeting and often leave things to chance. The outcome of not having a budget is that you lose track of your spending, end up in a lot of debt and end up not achieving a lot of your financial goals. My challenge to you this September is to start! Start with being honest, write down your sources of income and list all your expenses (including the money spent for haircuts and car wash). Compare the income vs. expense, adjust, change if need be and cut down if you have to. Be intentional and consistent. Remember that the budget is the foundation of all your financial planning aspects