Monday | 04 May | 2020
By Essie Bester
In times of crisis and uncertainty it is more important than ever to have a proper budget. With a well drawn-up budget as a point of reference, you can evaluate your expenditure, purchases and money decisions and test them against the goals you want to achieve.
It can be used as a measuring instrument to determine how your money decisions are going to affect your future financial security. A budget that is fully in line with your goals and is consistently used as a frame of reference, will help you to spend and save your money with greater intention.
Proactive money control
In the absence of a budget you merely at the end of each month determine on what you have spent your money and how much (if any) you have left over. A proactive budget will help you to spend your money in such a way that it works proactively for you.
This means that you must account for every rand you earn in advance. You therefore assign a “job” to every rand of your income. This task can become more challenging if your income is not the same every month, if you have several sources of income or earn a varying commission. If this is the case, making safe assumptions (conservative income amounts) and accurate predictions will help you to control your influence proactively.
Stress test your expenditure
Your budget, just like life, is not static. After having allotted a “job” to every rand of your net income, this theory will have to be tested against your actual expenditure. Therefore, to make sure that the values built into your budget are realistic, it is necessary that you compare your budgeted expenditure and income with the actual expenditure and income on your bank statements.
Consider the following when you stress-test your budget:
Your fixed expenditure will enable you to make fairly accurate predictions because it is costs that remain constant over a period of time (for instance rent and insurance). However, keep the unforeseen in mind. Consider saving a small amount for this under regular expenditure.
Electricity, clothes and the maintenance of your property are examples of variable expenditure that can vary from month to month. Protect your budget against these variables by allotting a value slightly higher than what is expected. This will give you some play in your budget, and you can use surplus funds later to pay off debt or to boost your savings.
This is expenditure that you did not plan for. However, some irregular expenditure can be planned for. The best way to manage varying expenditure is to record future costs (e.g. your car’s annual service) on a year planner ─ it can help you with your predictions. Also save a small amount every month for other unexpected expenditure (such as a doctor’s appointment).
If you have to cut back on your expenses, first check you discretionary spending. Check all your subscriptions, find out whether a cheaper gymnasium contract is available, look at an alternative DStv package or commit yourself to home meals rather than eating out.
Although a budget must be fairly fixed, it must not be inflexible. Your budget must be adaptable as your circumstances change. Poor market returns or unrealistic goals may force you to adapt your budget. This could mean that you revise your goals, cut back on your expenditure, increase your income, or a combination of all three.
Be prepared for the unexpected
An emergency fund is one of the surest ways of protecting your budget against big, unexpected expenditure. How strong your emergency fund should be, will depend on various factors. Consider your unique situation before summarily assuming that three months’ income will be sufficient. Factors such as the possibility of retrenchment or job loss, the age of your appliances and whether you are fully insured can all play a role.
Highlighting bad spending habits
If you review your budget regularly and keep an eye on expenditure you will be able to identify bad spending habits fairly fast. Convenience spending is perhaps easily justified because you work hard. It could, however, be disastrous to your budget. If your expenditure is too high, first look at your convenience spending. Costs such as online shopping, take-away meals and garden services easily sneak into your budget and could become fixed expenditure unnoticed.
Unrealistic financial goals could put unnecessary pressure on your budget and leave you disillusioned. Make sure your goals are achievable in terms of your income and expenditure, lifestyle, earning potential and future career opportunities. Prevent the pursuing of unrealistic goals by first prioritising your goals in order of importance before you allocate money to it.
Planning and prediction
Every month is different. Think about the festive season, tax year end, salary increase time, bonus payments and planned holidays. Predicting will allow you to take these things into consideration while facilitating the reallocation of your money.
A mechanism for avoiding debt
With a well thought-out budget you can calculate your debt-to-income ratio and make sure that you do not have too much debt. Your debt-to-income ratio is a yardstick for personal finances and compares the amount of debt you have with your total income. Financial institutions use this ratio to determine your ability to manage repayments and to pay back the money you have borrowed.
An early warning system
The regular revision of your budget will give you timeous warning of problems. If your expenses exceed your income, it is important to identify the problem as soon as possible and to do something about it.
* All information was correct at the time of publication.