Budgeting: Creating a Financial Roadmap

Creating a budget is a key step in gaining control over your finances. It helps you understand your income, track your expenses, and develop a plan to reduce debt while boosting savings.

Not having a budget is like flying a helicopter blindfolded—it's almost guaranteed to end badly.

10 Steps to Building a Budget You’ll Stick To

Step 1: Start Learning

By reading this, you're already on the right path. Building wealth is a process, and 95% of it is about changing your behavior, while the remaining 5% is managing your money.

Think of it as a game, with financial freedom as the goal. The more you learn and improve, the better you’ll get at growing your wealth!

Step 2: Know Your Income and Expenses

Guesswork won’t do. It's time to pinpoint exactly where your money is coming from and where it's going.

Knowing your income is usually straightforward. Most people rely on one main source, such as a salary. Other possible income streams include commissions, bonuses, rental income, interest, dividends, allowances, or child support.

Tracking your spending can be trickier. A simple way to get a handle on it is by reviewing your bank statements over the past few months, especially if you primarily use your bank card. You’ll quickly spot recurring expenses like bills and subscriptions. If you tend to use cash, consider manually logging your spending for a month or two.

Step 3: Track Your Expenses

Now that you're aware of where your money’s going, it's time to actively track it. This helps you transition from mindless spending to intentional spending.

You can do this with a small notebook, or use a smartphone app. The key is to record each transaction. Setting up SMS notifications from your bank can also help by alerting you every time money leaves your account, giving you the chance to log those expenses as they happen.

This might seem tough at first, but if you're serious about improving your finances, you're ready for this step.

Here is the app I use to manage my expenses.

Step 4: Sort Your Expenses into Categories

Take the list of expenses from Step 2 and sort them into categories—think of these as your “priority buckets.” Some expenses are essential, while others aren’t.

For example, food is non-negotiable because you need it to survive. Mobile data, while important for modern communication, isn’t quite as critical. Your hobby of taking taxidermy classes might bring joy, but if it’s impacting your ability to pay rent, it may need to take a backseat for now.

Here’s a general guide to help rank your expenses:

• Essential Needs: These cover basic survival, such as food, rent, school fees, and transport.
• Protection: Expenses that safeguard your health and financial future, like medical aid and insurance.
• Quality of Life: Things that improve your lifestyle, like hobbies, gym memberships, or a gardening service.

The idea is to prioritize your spending, starting with what’s absolutely necessary.

Step 5: Set Your Goals

Remember, you’re more than just a list of expenses—you have dreams, hopes, and aspirations. To keep your budget meaningful, you need to outline what you want out of life and make your budget a tool for achieving those goals.

Take Thabo (a hypothetical example). Right now, Thabo works in finance, but Future-Thabo wants to be an engineer. To get there, Thabo needs to go back to university, which means he must cut back on lower-priority expenses, pay off debts, and start saving for tuition.

Don’t forget about Present-Thabo though. Setting small short-term goals and rewarding yourself when you hit them will help keep you motivated along the way.

Step 6: Decide Where to Cut Back

Let’s talk about trimming your expenses. The aim is to spend less than you earn, eventually freeing up money for savings and investments.

If you’re currently spending more than you earn, start by reducing your aspirational expenses. You could also look for easy savings, like bringing lunch to work, carpooling, or cancelling unnecessary subscriptions.

Take it easy on yourself, though. Cut back gradually—making drastic cuts too quickly could lead to burnout and giving up.

Step 7: Build Your Budget

Now the moment has come—time to create your budget.

Most people use a spreadsheet, but if that’s not your style, a notebook and calculator work just as well. Alternatively, download an app if you prefer using tech.

Start by listing your total post-tax income, then break down your expenses by category, prioritizing the essentials. Be sure to include a buffer for unexpected costs, like birthday gifts. If you have high-interest debts, such as credit card or store card debt, prioritize paying these off before saving.

If your expenses outweigh your income, you’ll need to make more cuts. Look for non-essential items to eliminate for a while.

Step 8: Make It Automatic

Once your budget is in place, automate as much as you can to make saving easier. Set up automatic transfers to your savings account at the start of each month, or prepare your lunches in advance to avoid unnecessary spending during the week.

Step 9: Review and Reflect

A budget isn’t set-and-forget—it needs regular reviews. As a human, you’ll be tempted by impulsive buys, and it’s easy to fall off track.

To avoid that, review your spending weekly. Go over your spending journal, receipts, and bank statements. If you’ve overspent in a particular category, adjust your behavior to stay on track for the rest of the month.

This process gets easier over time, and as you practice better money habits, you’ll become a more skilled financial manager.

Step 10: Grow Your Wealth

At the start, you thought you were learning how to control spending, but you were really learning how to build wealth.

If you stick to your budget despite the challenges, you’ll eventually find yourself debt-free, with savings and investments. Whether that means retiring early or simply being debt-free, you’ll have achieved financial success. And that, my friend, is winning.

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[Disclaimer: This post is for informational purposes only and does not constitute financial or tax advice. Consult with a qualified professional to tailor a plan that suits your specific situation.] ????