Budgeting is the process of creating a plan to manage your finances. By using a budget plan, you create an overview of your income and expenses. The budget allows you to keep track of your financial position so that you can make critical economic decisions, such as:
- Setting your financial goals
- Determining how much you should be saving
- Whether you can afford a specific luxury item
- Where you need to cut back your spending
What's my income?
The first step in creating a budget is calculating your total monthly income. Include all sources of income (plus any income your wife/husband or partner receives). Examples include your salary, rental income, and interest or dividends from investments.
Remember, you must use after-tax figures in your calculations. If you are a salary earner, your take-home pay is already the after-tax amount.
What are my expenses?
Now, look at your monthly expenses. These fall into two broad categories, fixed and variable costs.
Fixed expenses remain the same every month and are usually paid by debit order. Examples include your bond repayments, car repayments, loan repayments and internet service provider.
Variable expenses are expenses which vary from month to month, such as groceries, fuel costs, water, and electricity etc.
Compiling this list of expenses is remarkably simple nowadays using one of the many budgeting apps available online, many without cost.
Drafting your budget
You are now ready to draft your budget. The main thing to assess is whether you are living within your means or spending more than your income.
If you are spending more than you earn, you must use your budget to see where you can cut down on your spending. It is usually tricky to cut down on your fixed expenses. However, it is often possible to cut down on your variable expenses, such as luxury items and entertainment. If you are living beyond your means, you must reduce your costs or increase your income (or both), otherwise, you will fall deeper and deeper into debt.
A budget is crucial when saving for a goal (for example, renovations to your home). If you are saving R500 per month, and the alterations will cost R100 000, you will be saving for 16 years before you reach your goal! That’s a long time. By looking carefully at your budget, you may find that you can cut back on some of your expenses and have more funds to put aside every month. You may have to sacrifice some things in the pursuit of your goal (renovations to your home). It is up to you to prioritise your wants and needs.
Final word
The bottom line is - live within your means. It’s so obvious, and yet so many people do the opposite: Buying fancy cars and spending much of their salaries to cover the payments; Extravagant holidays, paying with credit cards to impress friends and family. Sooner or later, your spending will outstrip your income which leaves the door open for the Sheriff and debt collectors to follow up on outstanding payments. Don’t let that happen to you.
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