Proper budgeting can save you from financial ruin – here’s how

Budgeting can save you from financial collapse in the difficult financial times we live in.

Everybody is feeling the pinch of higher food and fuel prices and even the middle class is starting to find it difficult to afford their lifestyles.

The past few years have taught consumers various lessons and if there is one you can take away from this turbulent time, it is the importance of a budget to combat the continuous financial stress we have to deal with daily.

A budget is a summary of your income and expenses for a month at a time. It shows you how much money you will have compared to your required expenses, such as your bond or rent and insurance, and the expenses you can control, such as eating out or entertainment.

If you put your budget in writing, it becomes an instrument you can use to plan how much you will spend and save every month, and analyse your own spending behaviour. Although it can make you quite depressed to draw up a budget if you have little money, it is necessary to save you from financial ruin.

The secret of a budget is that you can use the money you save in one category to top up another category or save or invest it.

The important thing to remember is that your budget will only work if you are honest about your income and expenses.

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Six easy steps to draw up a budget

Do not compile your budget on a scrap of paper and rather use a book or a computer programme such as Excel or an app.

1. Gather all your financial documents

Before you start, get all your financial documents, such as your salary slips, bank statements, investment statements, recent water and electricity statements, credit card statements, statements for your car loan and slips for purchases together so that you can calculate your average expenses per month.

2. Calculate your income

Calculate your monthly income. If your monthly income is a normal salary paid monthly after tax was deducted, use the nett amount, but if you work for yourself or also have other means of income, such as maintenance for a child, add that and write it down as your monthly income. If your income varies because you work for yourself, use the smallest amount you have earned in a month.

3. Make a list of your monthly expenses

Make a list of your monthly expenses and include these payments:

• Bond repayments or rent
• Car payments
• Insurance
• Groceries
• Payments for water and electricity
• Transport costs, such as fuel, bus tickets or taxi fare
• Child care, such as school fees, aftercare and extra-mural activities
• Personal loan payments, such as study loans
• Savings
• Personal care, such as going to the hairdresser
• Entertainment
• Eating out.

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4. Determine your set and variable expenses

Set payments are compulsory payments that usually stays the same, that you have to pay every month, such as your bond or rent, car loan, internet, water and electricity or school fees. Also add any other monthly payments that stays the same.

Variable expenses change from month to month, such as groceries, fuel, entertainment and gifts. Also add a category for emergency expenses that can happen quickly and wreak havoc with your budget.

Calculate how much you spend monthly on each category and use your documents to confirm the figure.

5. Calculate the total for your monthly income and expenses

If your income is more than your expenses, it is a good place to start. You can use the extra money to pay off your debts faster or you can save it.

You can also use the budget formula of “50-30-20”, that requires that expenses that you cannot do without, should make up 50% of your budget. Expenses on other categories must make up 30% and your savings and debt payments 20%.

However, if your expenses are more than your income, which is often the case now, it means you spend too much and have to cut back on your expenses.

6. Change your expenses

When your expenses exceed your income, you have to find places in your budget where you can change your variable payments. Find categories where you can spend less, such as eating out less or scrap categories such as paying for gym and rather exercise at home.

If the gap between your expenses and income is very big or if you have a lot of debt, it will probably not help much to change your variable expenses. You would then probably have to cut the set expenses or increase your income to ensure your budget balances.

Using your budget

Once you have drawn up your budget, you have to watch it every month to ensure you stick to it. Keep a record of what you spend money on to ensure you do not spend too much. If you are an impulsive buyer, it is a good idea to put the money in different envelopes. If the envelope is empty in the middle of the month, you have to stop spending on that category or use money from another where you have to cut your spending then.

Your goal must be to spend less than you earn.

Keep working on your budget

Review your budget as your circumstances change, such as having a baby or moving house. If you do this regularly, it will become easier to balance your budget and save. Remember: your budget must work for you. You must not work for your budget.

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