MONEY BASICS WITH MARTIN HESSE
If money flows out of your bank account without you knowing where it’s going, if you regularly run out of money before you run out of month, and if you seem to be stuck in an endless cycle of financial ups and downs with no progress in sight, there’s one thing you need: a budget.
It means being disciplined and setting aside a few hours each month to do some admin work, but it’s worth it. By getting a grip on what is coming in and going out, you can:
- Keep tabs on your spending habits, checking where you are spending excessively;
- Ensure that you are not spending more than you earn;
- Reallocate money towards higher-priority items, such as debt repayments; and
- Set financial goals that will get you out of the rut you’re in and on the road to a more secure financial future.
Your personal or household budget is a tool that tracks your monthly income and expenses. Ideally it should compare the amounts you have allocated towards various expenses with what you actually spend.
Instead of viewing a budget as restrictive, preventing you from enjoying your money, you can view it as a means to achieving your goals.
Be honest with yourself
A budget only works if you are honest with yourself about your income and expenses. It may show you, for example, that you are spending excessively on nice-to-haves such as fancy foods or designer clothes while falling into arrears on municipal bills or debt repayments.
Ultimately, your budget is about achieving balance: balance between what is coming in and what is going out, balance between wants and needs, and balance between short-term and long-term goals.
Spending on luxuries for yourself is okay, and should be written into your budget, as long as this is in proportion with what you spend on essentials and put away in savings.
Monthly worksheet
Your budget should take the form of a monthly worksheet or table. You can do it on paper, on a spreadsheet application on your computer, or by using one of the many budgeting apps now available online. Essentially, there should be three columns: line item, budgeted amount, and actual amount.
The first few lines should be devoted to your income: your net monthly salary, any additional income you receive from bonuses, commissions or side hustles, and any income from investments such as interest on a fixed deposit or rental on a property.
The rest of the table should reflect your expenses, grouped into categories. First, list all your fixed expenses. These are expenses that don’t change and you pay regularly each month, possibly by debit order. They include accommodation (rent or bond repayments), repayments on your car loan, municipal rates, insurance premiums, cellphone contract, internet streaming and security contracts. This is where you would also include regular monthly amounts towards savings or investments.
Finally, you need to list your variable expenses: those expenses that change from month to month: transportation (taxi fares, petrol, parking), food and groceries, electricity and water, clothing, personal care, home maintenance, and entertainment.
Then you need to go through your bank statements and shopping receipts, to populate the column of actual expenditure against each line item. This can be time-consuming, especially when categorising supermarket purchases.
Once you have a record of what you actually spent in a month in the different categories, you can get an idea of where you could be cutting back or spending more. This “ideal” allocation will form your budget column, to which you can try to adjust your spending in the months ahead. Don’t forget, your budget column is not cast in stone. But it should guide your spending going forward.
You could also group your expenses into necessary expenses (such as accommodation, food, clothes and transportation) and discretionary expenses, which you could, at a push, do without (such as your cellphone contract, DStv subscription, garden service, entertainment, and gym contract). This makes it easier to know where to start cutting back.
Well-balanced
Each individual is different, and our needs are different. But here are a few guidelines, gleaned from finance experts.
Your biggest expense is likely to be accommodation: either your rent or home loan payments. Ideally, this should account for not more than 30% of your monthly expenditure.
Transportation, food, and other necessities should account for 40% (including your monthly vehicle repayments, which shouldn’t be much more than 10% of your income). Of the remaining 30%, at least 10% should go to savings, and the rest you can allocate to your “wants”: entertainment, hobbies, holidays, and luxuries.
Importantly, debt repayments (excluding your mortgage bond but including vehicle finance, personal loans, credit cards and store accounts) should not make up more than 20% of your total expenses. If they do, you are in danger of becoming over-indebted. Reducing debt should always be a priority in your budget.
This article was first published in the September 2022 issue of our free digital magazine, IOL MONEY.