The whole aim of creating a budget is to gain control over your financial life, the overarching benefit of which is (ultimately) financial independence. That’s the dream, isn’t it? Being able to take care of yourself and your family while still being able to afford the things you want. Smart budgeting and having the discipline to stick to “the plan” are habits you need to cultivate if you’re ever to enjoy financial independence; and the earlier you start, the better.
Here are five steps to creating a realistic, yet smart budget that you’ll be able to stick to!
Step 1: Calculate Your Expenses
It’s the simple equation that pretty much determines any individual’s or enterprise’s financial success: money in > (greater than) money out. As such, any budgeting exercise needs to start with a thorough assessment of your expenses, for example:
- Rent or mortgage payments and rates, etc.
- Utilities (water, electricity, etc.)
- Medical aid and medication
- Home and life insurance
- Petrol and car insurance
- School fees
- Groceries for the home
- Shopping: toiletries, clothing, gadgets, appliances, etc.
- Entertainment (everything from movie rentals to eating out)
- Monthly subscriptions (Netflix, magazines, websites, etc.)
- Credit card and other debt payments
Be as accurate and detailed as possible in your assessment of your monthly expenses because this will give you a comprehensive picture of where your money is going every month and the areas in which you are needlessly wasting it.
Step 2: Determine Your Income
This should be an easy one, especially if you earn a fixed monthly income. If you freelance, run your own enterprise, or earn commission, you can approximate an average monthly salary by averaging the total income you’ve made over the past year.
Step 3: Create Goals for Saving and for Paying Off Debt
With step 1 and 2 complete, you will be able to see whether you’re on the right side of that equation (money in > money out). If not, this is where you can scrutinize your expense sheet for areas in which you can tighten your belt:
- Instead of expensive take-out coffee and café-bought lunches, make your own lunch and coffee (in a thermos flask) at home. This can easily save you R100 a day = R500 a working week = R2000 a month.
- When you go for your weekly grocery shop, be a little thriftier with your spending. Buy in bulk, opt for less expensive brands, and avoid unnecessary spending on items you can do without. This can save you hundreds of Rands every week.
- Cut back on dining out and instead, help your spouse (or ask them for help) to create a fun and diverse meal plan for the week. If you are a family of four, this can easily save you at least R600 a week = R2400 a month.
- Instead of going to the shopping mall for entertainment where you’re only likely to succumb to buying temptation, spend more time outdoors. Go for a picnic, a hike, a walk, or to the beach for the day. This can, depending on your spending habits, save you upwards of R1000 per month.
These are just a few ways you can cut back on unnecessary spending and with this extra money in hand you can create a list of goals for saving and paying off debt faster. Allocate portions of your income to (1) a savings account, (2) an emergency fund, (3) retirement contributions, and (4) debt repayment.
Step 4: Record Your Spending Habits and Track Your Progress
Now it’s time to track your progress! Keep a detailed record of your spending habits by writing down every single purchase and deduction that comes off your account. Seriously, don’t even buy a take-away coffee without making note of it. At the end of each month, tally up your expenses and voluntary spends to see how much you’ve managed to improve your habits. Each month, try to do better!
Step 5: Be Realistic!
The secret to sticking to a budget is to be realistic. You’ll only set yourself up for failure if you create a list of impossible goals that don’t allow for any kind of enjoyment. If you allocate a portion of your income for pleasure, as well as for possible unforeseen expenses, you’ll give yourself the breathing room you need to enjoy your life and survive financial bumps, while still accomplishing your goals.