Setting up a budget is a crucial first step in getting control of your finances, because it shows you how much you earn, how much you’re spending and let’s you plan a path to reducing your debts and increasing your savings.
Not having a budget is like flying a helicopter blindfolded and it’s very likely to end in disaster.
So, if you’re keen to stop living from month-to-month, to stop running out of money by the 5th of the month, to clear your debts and start saving up for the things you really want, then take off that blindfold and read on.
It’s time to stop guesstimating and find out where your money’s at (literally). The first step is to identify how much you earn and how much of that you spend on a monthly basis.
The earning part is usually easy enough cos, for most of us, our earnings come from *one* source, typically a salary or wages. Other common sources of income include commissions, a bonus, rental income, interest income, investment income (dividends), an allowance, and even child maintenance.
Now list your spending. This is where things can get hazy, because we often spend our money without much thought.
A really quick way to find out how much you’re spending is to check your bank statements for the last couple of months. This works really well if you tend to pay for things using a bank card. It’ll also reveal things that automatically come off your account, i.e. debit orders, like your cellphone bill. If you’re into buying things with cash, then manually tracking your spending for a month or two is the way forward.
This step is about becoming aware of your spending habits and changing your behaviour. Keeping a spending journal will help you to move away from impulsive spending into conscious spending. Be it a little notebook that fits into your pocket or on your phone or even with a fancy app you downloaded, it’s up to you. So long as you’re making a note every time you spend your money, you’re on the right track.
While you’re at it, consider setting up SMS notifications so you’ll know every time money leaves your bank account. When you get an SMS, make a note of that too.
It may be challenging at first, but if you’re reading this, you’re probably ready to take it on.
In this step, you need to take that list of expenses you made in Step 2, and sort them into some categories. Think of these as “priority buckets”. Some expenses are just more important than others.
Take food, for example; without it, you’d die. So food is a top priority. Without data for your phone you won’t die, but your life will be really difficult because it’s a major way people communicate these days. Your taxidermy classes on Tuesday evenings may bring you a lot of joy, but if paying for these means you can’t cover your rent, then it’s something you might need to do without for a while.
The idea here is to rank your spending from the most critical to your survival, to those that you could easily live without. Here’s a list we put together to help guide you:
Aspirational expenses are the least crucial and you should only spend on these things if you’ve covered all the spending in previous categories, e.g. if you have enough money to survive, protect your wealth, and improve your life, then you can justify things like cat-poop-coffee, weekends away, Chinese takeaways, a magazine subscription, and so on.
Once you’ve categorised your spending, you need to lift your right arm up above your head. Bend your elbow so the palm of your hand comes to rest on your back, and start a slow, steady pat. Well done, you! You’re doing great. You now know what’s really going on with your money and that’s a powerful advantage.
Okay, hold up now. You are not the sum of your expenses. You’re a person with feelings, hopes, dreams, and aspirations. If you reduce yourself to a balance sheet, in no time at all the joy is going to be sucked out of your you-know-what. To avoid losing your joy in this way, you need to establish what you want out of your life, so that you can make your budget a tool that helps you to realise your dreams.
Take Tim (we made him up). At present, he’s in finance, but Future-Tim wants a career in engineering. Present-Tim has no training in engineering, so to realise this goal, he’ll have to go back to university. Present-Tim has also been living from month-to-month, so if he’s serious about making Future-Tim happy, he’ll need to cut back on some low-priority spending, clear any debts he may have, and start putting the cash that’s left over aside to cover study expenses.
But don’t completely neglect Present-Tim. He needs to be kept happy too. To do this, create some short-term goals as well and budget for small rewards for achieving them, just to keep motivated.
Let’s talk cut-backs. If you discover you’re spending more than you earn, then it’s time to see where you can reduce spending. You could start by looking at the things you’re buying that fall into the Aspirational category and see if cutting back some of these will fix the problem. Be nice to yourself and cut back slowly. If you’re too drastic about cutting things out, you’ll get very bleak and you’ll probably give up.
Drum roll please…you’re finally ready to create your budget.
Using a spreadsheet for this is what most people do, so we set one up for you here [link to budget sheet]. But if you have a mortal fear of spreadsheets, a pen, paper and a calculator will also work. If you’re into using tech, download an app (there’s an app for pretty much everything).
Write down your total earnings after tax (i.e. the money you get paid). List your expenses (cutting back where you can) in categories (i.e. in order of importance). Allow a buffer for those unusual or unexpected expenses that creep up, like your mom’s birthday. If you have bad debts [link to article on debt], like store card debt or credit card debt, make it a top priority to pay it off before you start saving.
Now, add up all those expenses and, if the total comes out higher than your total earnings, you’re going to need to cut back a bit more. See if there are any more low-priority expenses you can do without. This won’t be a forever situation, but may be necessary for a couple of months until you’re in a better position financially. You may be thinking, “Well, obviously I just need to earn more then.” and that is always a great idea, but not always realistic. Remember, it’s much easier to spend R100 less than it is to earn R100 more, so cutting back is key to clearing debt and building wealth.
A lot of people would mistakenly think that, once their budget is set up, they’re done. Remember how we said you’re a human? Well, you are. And because you are, you’re likely to get tempted into impulsive buys (using all manner of justifications), and soon you’ll be too scared to look at your budget cos it’ll just make you feel like a failure.
To avoid this fall from grace, we recommend you review your spending at the end of each week. Go through your spending journal, your receipts, and your bank statement (online banking ftw!) and see if you’re on track with the goals you set yourself. If, by the second week of the month, you’ve already exhausted your entertainment target, you can avoid making the situation worse by staying in for the rest of the month.
All this time you thought you were learning how to reign in your spending, but really, what you’ve just learnt is how to get wealthy.
If you stick to it, despite setbacks, you’ll eventually be debt free with a nice amount of money saved and even some money invested. You’ll have used that extra cash to buy adult things like assets and perhaps you’ll be sitting on a deserted island (which you own) retired well before 60. But even if you’re just debt free, you, friend, are winning.
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