In the last article I touched briefly about budgeting and if you are serious about saving money then setting up a monthly budget is something that is particularly important to do. The reason being is because you need to know and understand where your money is going every month otherwise how you are going to find ways to save it!
If you are thinking “well I think I spend about R3000 on groceries every month so I will try and cut that to R2500 a month so then I can save R500 a month”, but in actual fact you are spending R4000 or more on groceries, well that is not going to help you one single bit. This type of scenario is exactly why you need a budget. Nothing can be “maybe”, “possibly” or “I think” when it comes to creating a budget. From the start you need to know exactly what you are spending your money on and where you are spending your money.
Now I know what you are thinking… that’s cool and all Wendy but how do I create a budget? I’m not some financial expert or anything. Well here’s the good news, you don’t need to be any type of financial person to work out a basic monthly budget!
To get started what you DO need to do is get all your bills, receipts, bank statements and anything else that shows an expense during the month together so you will have all the information you need “at your fingertips” so to speak.
Now, here is where I go a bit old school and I sit with a pen and paper, draw 2 columns and make a list of my expenses (e.g. electricity & water or school fees) into the first column and then fill in the expenses in the 2nd column (e.g. R4000). If you want to use your computer to create your list, please feel free. Basically, by the end of this exercise you need to have listed all your expenses and what they cost all onto 1 sheet of paper, so it is easy to see/read.
Right, so you have all your expenses listed and you know exactly how much you are spending and what you are spending your money on. Hopefully at this stage you have not fallen on the floor in a dead faint at the amount of money you are spending every month! It is amazing how quickly the numbers add up!
Next, you need to know what your monthly income is. This is the money you have in your bank account to spend. It is not your GROSS monthly income. You need to use the amount that is your NETT monthly income (i.e. If you earn R15 000 a month, that is not the amount that you can spend), you need to work with the amount that gets deposited into your account each month once tax and PAYE and UIF etc has been taken off if you are someone who earns a salary. If you are like our family my husband and I share all monthly expenses so instead of having 2 different monthly budgets we combine all our expenses and both our incomes and work from there.
Okay, so now you have your total monthly expenses and you have your total income, these are going to be your most important numbers going forward in life… okay so I am exaggerating a bit … but these are going to be the numbers you are going to live by from this day forward. The goal is to decrease your expenses (and if possible, increase your income) so that will create your SAVINGS.
2 Main Types of Budgets
Now that you’ve done the groundwork, it’s time to decide what type of budget you want to create. Everyone’s budget will be different of course, so you will need to choose one which makes the most sense for you and your family. I am not going to go into the nitty gritty of budgets themselves but the 2 most popular are:
“A zero-based budget” This is a budget that was popularised by Dave Ramsay and it involves making income minus outflow = R0. With a zero-sum budget, every rand you have is assigned a job, with some of those rands going into savings and the rest assigned to different spending categories (e.g. petrol, groceries, school fees etc). This budget is very restrictive and therefore is not for everyone.
“A 50-30-20 budget” With this approach, which Elizabeth Warren helped create, 50% of income goes toward needs, such as rent, food, and debt payments. Thirty percent is for wants, such as trips or entertainment. Lastly, 20% goes toward savings. This budget is a lot more flexible than the zero-based budget so seems to be more popular.
If you want to know more about budgets, the different types of budgets you get, and even how to set up a budget the internet has PLENTY of information for you. Remember Google is your friend! In fact, there are even many programmes and apps you can download which will help you with your budgeting.
To be honest I myself don’t do anything elaborate, I follow the most basic of monthly budgets, but it works for us and then I follow these rules:
What you WANT vs what you NEED
This is something that is very important to do. You need to distinguish from all your expenses what are WANTS and what are NEEDS. So, your needs would obviously be petrol, school fees, rent, so needs encompasses the things that NEED to be paid in order for you to live. Wants are things that are nice to buy or have but you don’t need them to live. Spending money on a Playstation 4, that is something that would be nice to have but you don’t need it.
All through the month while you are spending money you need to keep asking yourself these questions: do I WANT this, or do I NEED this? Can I live without it? Will spending money on this item get me closer to my savings goal or is it going to take me further away from my goal? If you have set yourself clear priorities the decisions you make become easier and easier. And of course, the more you practice this the easier it becomes too. Hey, I am not saying it’s always going to be easy and you might find yourself trying to convince… well yourself… that you really NEED that expensive designer bag or shoes but then remember to ask yourself those 2 important questions and see what you decide.
Don’t spend more than you make
Now, looking at your income and expense figures you need to make sure that you are not spending more than you are making! If your expenses are more than your income you have your work cut out for you, but don’t despair I know you can do it! Try and not use your credit cards (yes, I am not going to lie to you, I know it’s difficult) but remember the more you spend on them the more interest you must pay back so the less you are going to be able to save, the same goes for most store credit accounts etc. We decided to only have 1 credit card which is kept for emergencies. And every time the bank calls me and asks if I would like a credit card it is so very difficult to say no, but I try and “keep my eye on the prize” because I know if I have that credit card in my grubby little paws it is going to be too much of a temptation and I will end up using it.
Review your budget from time to time
You need to review your budget and adjust it from time to time. See how much you spent each month, see where you overspent, and if you had extra left over which you managed to save. Then, adjust your budget according to what you’ve learned. This is very important to do, especially currently. Everything is just getting more and more expensive and you need to take that into account in your budget. Last month groceries might have cost you R4000 but this month with increases now groceries are costing R4500 so you need to adjust your budget to make allowances for that. Maybe to make up for it you can cut down your entertainment budget by R500, so stay home rather than going out to the movies and dinner just as an example.
Reviewing your budget isn’t always for a negative reason either; you could get a salary increase or you could be starting a new job where your salary is more or maybe you have started a “side hustle” and you are making some extra money you weren’t before. You need to sit down and revise your budget to take all these factors into account.
To end off budgets can be as easy or as difficult as you want to make them. I follow the KISS mentality – Keep it Simple Stupid!