Budgeting – And why it is important
What is a Budget ?
Spending less than we make is often cited as the most important personal finance goal. It helps us get out of debt, save for emergencies, and stash money away for retirement. It’s the primary habit that enables us to achieve some level of financial freedom.
Budgeting lies at the foundation of every financial plan. It does not matter if you are living pay-check to pay-check, or earning six-figures a year, you need to know where your money is going if you want to have a handle on your finances. Unlike what you might believe, budgeting isn’t all about restricting what you spend money on and cutting out all the fun in your life. It is really about understanding how much money you have, where it goes and then planning how to allocate those funds best.
The main reason to create a budget is to help you keep your finances under control by keeping track of how much money you’re spending and where it goes. When you begin to stray from your budget, it’s usually because of spending too much money somewhere. But if you have a budget that tells you exactly how much you’re supposed to spend, why is it so easy to overspend? There are a number of reasons we overspend, so when you understand what causes overspending, you can help put a stop to it and keep your budget on track.
The goal of a budget is not to track every dime we spend. That is certainly one way to budget, but it is not the goal. In fact, one can know where all of their money is going and still not have an effective budget. The goal of a budget is to help us control our spending so that we can spend less than we make and focus our spending on what matters most to us. However you choose to budget, it should meet this goal. If it does not, you’re doing it wrong.
Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or home loan payments, car payments, groceries, insurance, health care, minimum debt payments and utilities. The “needs” category does not include items that are extras, such as junk food, internet access, and clubbing or alcohol and etc.
Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronics gadget and Internet. This category also includes those upgrade decisions you make, such as choosing a costlier steak instead of a less expensive hamburger, buying a Mercedes instead of a more economical Toyota or choosing between watching television using an antenna for the cost of a tv license or spending money to watch satelitte TV. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.
Allocate 20% of your income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making pension fund contributions or investing in the stock market.
Savings can also include debt repayment. While minimum payments are part of the “needs” category, any extra payments reduce principle and future interest owed, so they are savings.
Budget to zero before the month begins.
This means before the month even starts, you’re making a plan and giving every rand a name. It’s called a zero based budget. Now that doesn’t mean you have zero rands in your bank account. It just means your income minus all your expenses (outgo) equals zero.
Do the budget together.
If you’re married, sit down once a month and have a family budgeting night, include your kids if you have any, best to start teaching them too. Make it fun! Grab some of your favorite snacks and put on a good playlist to help you focus.
You need to get on the same page with money, so set goals together and dream about what the future will look like. Remember: If the two of you are one, your bank accounts should be one too! It’s no longer your money or my money—it’s our money.And if you’re single, find someone who can act as your accountability partner and help you stick to your goals!
Every month is different.
Some months you’ll have to budget for things like back-to-school supplies or routine car maintenance. Other months you’ll be saving for things like vacations, birthdays and holidays. Regardless of the occasion, make sure you prepare for those expenses in the budget. Don’t let these special occasions sneak up on you.
Be sure to adjust your budget each month as things change. Make a savings fund you can stash cash in throughout the year. When you don’t have a plan, you’re going to be stressed. And that takes all the fun out of giving and celebrating. No one wants that!
Start with the most important categories first.
Giving and saving are at the top of the list, and then comes the Four Walls—food, shelter and utilities, basic clothing and transportation. Once your true necessities are taken care of, you can fill in the rest of the categories in your budget.
Pay off your debt.
If you have debt, paying it off needs to be a top priority. Contact Debt Mate and speak to one of our advisors to get rid of debt as fast as you can. Attack it! Get mad at it! Stop letting debt rob you of the very thing that helps you win with money—your income.
Don’t be afraid to trim the budget.
Brace yourself! It might be time for some budget cuts in your life. If things are tight right now, you can save money quickly by canceling your cable, dining out less, and shopping at discount clothing and grocery stores. Remember, your budget cuts are only temporary. You can always make adjustments later down the road.
Make a schedule (and stick to it).
While you’re making a budget part of your monthly routine, why not pick specific dates for other expenses? Set up auto drafts out of your checking account to pay bills, and buy your groceries on a set day every week or twice a month. When you know what to expect and when to expect it, you take a lot of stress and potential pitfalls out of the picture.
Track your progress.
It’s important to check your progress from time to time. If you’re married, track your spending and purchases together so you both keep your goals in sight. Look back at your earlier budgets to see how far you’ve come. And don’t forget to celebrate the small wins. (Pro tip: One key category to keep a close eye on is your grocery budget. I bet you are spending significantly less on groceries on a budget.)
Create a buffer in your budget.
Put a small amount of money aside for unexpected expenses throughout the month. Label this as your miscellaneous category in your budget. That way when something comes up, you can cover it without taking away money you’ve already put somewhere else. Keep track of expenses that frequently end up in this category. Eventually, you might even want to promote them to a permanent spot on the budget roster.
Cut up your credit cards.
If you’re really committed to sticking to a budget and getting out of debt, you need to ditch those credit cards for good. Stop using them! Cut them up, shred them, or even make a craft project out of them! Whatever you do—get them out of your life.
Having no credit card debt will mean no more minimum payments to add to the budget, zero hassle with fees or high interest rates, and much less stress and worry! Stick to using your debit card (and even cash!), and dump those credit cards like your ninth-grade fling. You know what the great thing about a debit card is? The money comes straight out of your bank account! There’s no middleman charging you 15% interest.
Use cash for certain budget categories that trip you up.
If you’re constantly overspending on your grocery budget or fun money, cash out those categories and use the hard limit system to hold you accountable. Just go to the bank and pull out the cash amount you’ve budgeted for that category. Once the cash runs out, stop spending! It’s the ultimate accountability partner.
Try an online budget tool.
If pen and paper (or spreadsheets) aren’t your thing, use our online calculator.
Be content and quit the comparisons.
You have much more than you realize. Don’t compare your situation to anyone else’s. Comparison will not only rob you of your joy but also your pay-check. Keep moving forward and doing what’s right for your family.
Whether you’re paying off student loans, , or building up an emergency fund, paying off your home loan, you need to focus on your why. What’s the reason you’re making these sacrifices?
Give yourself lots of grace.
It usually takes three to four months to get a handle on this whole budgeting thing. It won’t be perfect the first time, or the second. But you’ll get there!