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In Greek mythology, Sirens were mythical creatures that lived on an island and lured sailors to their doom through enchanting songs. Sailors, who could not resist the temptation of the Sirens’ song, helplessly wrecked their ships on the island’s rocks.
Personal finance works roughly the same. We all know that debt is a bad thing and that we should always remain within our personal income limitations. Yet the temptation of easy loan availability makes it as hard to resist as the Sirens’ song.
But the story continues. Orpheus, a talented and charming musician was called in by the Argonauts to assist them on an expedition that would lead them past the notorious island. As they approached the island, Orpheus eard the Sirens’ voices, immediately took out his lyre and started to play. Thanks to his music being louder and more beautiful than the Sirens’ song, the crew managed to sail past the island safely.
In personal finance, the lyre is nothing other than a well-planned budget. The trap that most people fall into, however, is convincing themselves that they can stick to their budgets by memorising them. Surely the need to formally draft a budget is redundant? Unfortunately, you are fighting a losing battle if this is your way of thinking.
A personal budget is fairly simple to set up and shouldn’t take more than 15 minutes a week to update. Always remember; if you can measure it, you can manage it.
Here is my 15-steps- in 15-minutes budget plan:
1. Preferably start with a blank Excel spreadsheet, or a columned sheet of paper.
2. Categorise your expenses by carefully working through the past week’s bank transactions or bills.
3. Do not forget to include your hobbies and other expenses, they also have to be categorised.
4. Any form of income that flows into your account has to be indicated clearly in order to determine your total average monthly income.
5. Remember that saving comes first and not after your expenses have been covered, so be sure to set a fixed amount aside on a monthly basis. Also ensure that you have a separate savings facility at your disposal.
6. Keep in mind a realistic target amount, in each expense category, by which you would like to cut your expenses in an attempt to save more.
7. Once satisfied that all possible categories have been covered, start capturing the data on your piece of paper or spreadsheet.
8. Take note of cash withdrawals and be sure to indicate them clearly on a weekly basis.
9. Calculate the subtotals of your income and expenses.
10. Subtract your total expenses from your total income to calculate your net income.
11. If you have a negative net income (i.e. your expenses exceed your income), you will have to seriously re-evaluate your spending habits.
12. If you have a positive net income, transfer the bulk of this amount to your savings account, unit trust or any other savings facility identified in step 5. Leaving the money in your bank account will lead to the temptation of unnecessary spending.
13. After a month or two, you should have been able to identify and quantify your spending, which means it’s time to have another look at possible ways in which you can cut back on them.
14. Set realistic goals in order to cut back on expenses by starting with the biggest expense first and then work your way down.
15. Keep your budget up to date and be sure to evaluate your budget on a monthly basis going forward. It’s extremely important that you take a realistic approach when preparing your budget. Keep in mind that you are not trying to impress anyone; you are working towards creating a prosperous future for yourself. More importantly, be disciplined and stick to your budget under all circumstances. It is the only way that you will be able to safely navigate the temptation of unnecessary spending and debt.
