Budgeting! What you need to know about the B-word

Budgeting is the starting point of any healthy financial plan and the baseline for achieving your financial goals. Individuals that are consistent in their budgeting efforts tend to get out of debt faster, realise their saving goals by being disciplined and start to practise smart spending. Whether you’re new to the budgeting realm, tried it before but didn’t maintain it or you’re on top of your finances, this article will shed some light on the key aspects of budgeting.

1)?????Know why you are budgeting

You should begin by identifying what is motivating you to construct a budget. Are you in debt, searching for ways to cut costs, or simply trying to scale back on your spending habits? Perhaps your goal is to have your dream wedding or you’re saving for a new baby’s arrival. Knowing why you're doing something generally inspires people to continue doing it. Expanding on that, when budgeting with a partner, make sure you're both on the same page by working through the details together. Understanding your motivation to budget will allow you to understand where your finances are going and how you can better direct them to achieve your goals.

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2)?????Prioritize expenses, liabilities and goals

You need to be clear about your needs and wants when creating your budget. Once you understand your needs you can prioritize basics, such as groceries, shelter, and transportation. Once your basic living costs are taken care of, the next major player in your budget should be your debt repayments of all sorts. This is not to say that your other financial goals such as retirement savings should be neglected, it simply states that taking care of your living expenses and debt repayments should be the top priority.

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3)?????Emergency and surprise fund

Each month presents different challenges and opportunities for your budget. Bear in mind that no budget is perfect, surprises do happen, and some expenses slip through the cracks. But even though those expenses may come through, it is important to take some financial precautions to soften the blow when they arise. Apart from miscellaneous expenses and impulse buys, major unexpected financial commitments could also arise such as urgent car or home repairs. These could severely affect your finances and could put you into unnecessary debt. Therefore, having an emergency fund with 3-6 times your monthly expenses is a vital aspect of any successful financial plan. Obviously, you cannot put that amount of money aside immediately. So, start small and build it up over time so that you can weather financial shocks without putting yourself in a detrimental financial position.

4)?????Save before you spend

This is an age-old rule of thumb that states you must save before you spend. Warren Buffett is cited as saying that you shouldn’t save what is left after spending, you should spend what is left after saving. Most people fall into the trap of spending first, which leads people to believe that saving is optional rather than vital. Saving should be thought of as a fixed expense and treated as such when assigning your income to your budget.

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5)?????Revisit your budget monthly to maintain it

Your month-to-month expenses will tend to jump around depending on the time of year, special occasions or unexpected costs. Checking your budget monthly will allow you to deal with variability in a timely manner. Checking your budget monthly will also allow you to see how well you have been sticking to your plan, and it gives you valuable practice in handling your day-to-day finances while refining and honing your budgeting skills.

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6)?????Practise budgeting to Zero

Budgeting to Zero means assigning every rand you earn to a specific part of your budget until you have nothing left to spare. That means – after accounting for your fixed expenses, monthly savings and paying for financial products and any extras you have – you should not have any money left to spend. Doing this will show you exactly where your money is going and perhaps give you an opportunity to reassign some of your income to other aspects of your budget.

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7)?????Incorporate “no spending” days into your month

In an effort to save money and limit impulse spending, one should look at assigning one day in the week to spend no money or only spend on what is necessary. This is an easy way for you to stay within your budget limits. For those truly committed to a “spending cleanse” – you could try to observe a no spend MONTH, apart from buying bare necessities. By doing this, you will truly see how much money is spent unnecessarily.

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8)?????Be consistent and don’t be too hard on yourself

Establishing a new budgeting routine and getting used to it does generally take time. Usually, you won’t get it 100% correct the first or second time. But it is all about being consistent and continuing to budget monthly to get your budget more accurate. Don’t be discouraged by budgeting. Get into your new budgeting routine, be kind to yourself and watch how you start taking control of your financial life!

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Budgeting doesn’t need to be a hugely time-consuming exercise. You probably already know where most of your money goes and roughly how much it costs. Budgeting simply gives you a graphical representation of where your funds are going and allows you to track it monthly to ensure you are staying on track. A budget shouldn’t be seen as a constraint, it is a tool for you to understand your money and make the most out of it while achieving your financial goals.?

Author:

Dylan Cutter - IWCP Social Media Specialist

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