Share

Budgeting – Finding the ‘bassist’ in your financial plan

Budgeting is usually a pet peeve around payday but it is one of the best ways to manage spending and in turn enhance one’s financial freedom.

That’s unless you’re one of the few trust fund babies who wouldn’t know what payday blues are… In an extremely informative blogpost off the Stealthy Wealth site, the writer, who wishes to remain unnamed in their quest for early retirement by 2030, looks at the art of budgeting, with some basic tips.

It’s not a get rich quick scheme, but it may put you on the path to prudent spending, and in the end, give you the tools needed for that much sought after financial freedom. – Stuart Lowman

From SW*

Knowing what you spend each month is vitally important if you want to do any sort of financial planning. How can you save if you don’t know what you spend? A budget is the Bassist in your Financial Plan Band1 – it links the rhythm of the drums (Income) to the harmony of the Guitar (Expenses) and allows you to make Music (Generate Wealth).

In this post I discuss how to draw up a budget and give you a template to download which you can use as a starting point. Rock On!

For those of you who don’t want the whole spiel – you can just download the Stealthy Wealth budget template and be on your merry way (although I feel used, I forgive you). But for those who want all the detail, here goes…

Why a budget is important

You may be wondering why you even need a budget. Well, whether your plan is simply to save for your next holiday, or something bigger like early retirement or financial freedom, your starting point is always your budget. You need to know your expenses so you can determine how much you can afford to put away towards your goal.

This makes the planning so much easier, and allows you to calculate if the goals you have set are achievable and how quickly you can get there.

I find budgets useful for another reason – it allows you to reduce and sometimes eliminate expenses, which you have either forgotten about, or allowed to get out of hand (that magazine subscription that you no longer read, or that gym contract which you keep promising to use). So it is very handy for trimming the fat.

Also once you have a budget drawn up, you can start playing with the numbers. What would happen if you stopped that DSTV subscription? How much can I invest once the car is paid off? So a budget is great to see the effect that certain sacrifices and achieving certain goals can have on your finances.

So how do you draw up a budget?

What I find to be the easiest method is to open your latest bank statement. From this you will be able to see all the money coming in (lekker lekker) as well as all the money leaving your bank account (oh no!).

Of course you must not forget about your credit cards and store accounts if you make use of these (store accounts please please please no, and credit card only if you use it in such a way that you never end up paying interest). So go ahead and get your latest bank statement, credit card and any other relevant statements.

The next thing you need is Excel2, or a free equivalent (Open Orifice Office can work). At the top you want to enter all your income items (this could be your salary, rental income or anything else that drops into your account). Once that is done, total up all the incomes so you get one income figure. Something like this:

SW_Budget_Income_July_2016
The nice part of the budget

The next thing you need to do is examine all the money leaving your account. You also need to combine same/similar expenses into a monthly total – for example you may have put petrol into your car 3 times, so add these up for a total petrol amount. Once you are done you should have a long lengthy list of items such as Rent, Insurance, Groceries, Cellphone, Electricity, Bank Fees, Petrol, Medical Aid, Internet etc.

The next thing I like to do is to split the expenses into “Fixed” and “Optional”. Now this might be a little subjective, but I define the Fixed Expenses as those expenses which are essential for your day to day life. Expenses such as Rent/Bond Repayment (you need somewhere to live), Car Repayment (repossession is never really any fun) and Groceries (meat’s meat and a man’s gotta eat).

The optional expenses are things which you could live without, like Entertainment (Party On!), DSTV (contrary to popular belief you really can live without it) and Insurance (be careful with this one, some insurance you can do without, some you should view as a must).

Back to the excel spreadsheet, and put these items under the Expenses section. Tally up the total from each into a subtotal. Something like this:

SW_Budget_Fixed_Optional_Expenses

Next total up the Fixed and Optional Expenses subtotals into a Total Expenses value.

So now that the total income and total expenses are known, you - or rather, Excel - can calculate the money left over and available for investing/saving for the month. In our example case:

Available = Total Income – Total Expenses
=> Available  = R26 000 – R20 900
=> Available  = R5 100

Important to note, this Available money is not available for spending, but rather available for investing. So the next items to add to the spreadsheet are the investment values. Maybe you are saving for your child’s education, or allocating some funds to your Tax Free Savings Account, or maybe you are planning on going on holiday. Add these to the spreadsheet and tally them up, something like this:

SW_Budget_Investments
Putting your money to work.

And the final calculation – the remaining funds at the end of the month. The remaining funds is calculated as the Available value less the total of all the investments (in our example R5 100 – R3 800 = R1 300).

Some people will have funds left over, others will not. If the funds left over is negative you have problems ahead and you need to address this as soon as possible! I will do a post on cutting costs in the near future and hopefully that will assist you on getting your budget back on track.

Planning ahead

So now you have drawn up a budget based on your past bank and credit card statements. This is all well and good for seeing how you have done in the past, but what we really need to do is plan better for the future.

So the next step is to take your budget and make a copy of it. Add the month and current year to the top (for example July 2016). This will now be your plan for your finances for the next month. It does need a few adjustments though.

We all know that each month is unique and each month has differing one off expenses. For example this month was our one friend’s baby shower. Next month is my Dad’s birthday. Or maybe your car needs to go for a service? So I usually add a “Unique Expenses” section to the budget:

SW_Budget_expenses_Unique
Unique expenses – because same is boring

Remember to add this sub-total to your Fixed and Optional Expenses to get your Expenses grand total. For our example, the total expenses for the next month is the Fixed Expenses (R16 900) + Optional Expenses (R4 000) + Unique Expenses (R200) = Total Expenses (R21 100).

After adding these expenses, make sure that the remaining funds is always positive. If the remaining funds goes negative as a result of some additional Unique Expenses you are going to have to cut somewhere else to make up the shortfall – maybe less eating out that month, or a pause on the holiday savings and delay your trip for a little longer?

In this way you can plan ahead and make sure you never run into a shortfall.

• SW is the pseudonym of a South African blogger with a mission to save enough money to be able to stop working at the end of 2030.

* For more in-depth business news, visit biznews.com or simply sign up for the daily newsletter.

We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
18.94
-0.1%
Rand - Pound
23.91
-0.0%
Rand - Euro
20.41
+0.1%
Rand - Aus dollar
12.33
+0.1%
Rand - Yen
0.13
-0.0%
Platinum
908.05
+1.2%
Palladium
1,014.94
+1.3%
Gold
2,232.75
-0.0%
Silver
24.95
-0.1%
Brent Crude
87.00
+1.8%
Top 40
68,346
0.0%
All Share
74,536
0.0%
Resource 10
57,251
0.0%
Industrial 25
103,936
0.0%
Financial 15
16,502
0.0%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders