Charné is a Registered Tax Practitioner and has written several magazine articles with financial related themes since 2006. She is a known finance and tax expert working as an adviser at lemons into lemonade financial planners cc.
In order to plan your personal finances, you need a budget. A budget is a summary of your monthly income and expenses. You should control your money and not let money control you, and you do this through a budget.
You start with the income that you earn which is the amount that is paid into your bank account. Then you list your expenses, first the “Basic Expenses” and then the “Additional Expenses”.
“Basic Expenses” fall into 4 categories and with most of these expenses, non-payment will result in a bad credit record:
1. Basic living expenses. Not paying these expenses will affect your health or the ability to earn an income for example food (excluding luxury items), basic transport (not car payments) and chronic medication (without which you may die or become seriously ill).
2. Housing and related expenses will include rent or house bond payment including electricity, rates and levies.
3. Basic debt payments will include car payments, car insurance if your car is financed and minimum payments on personal loans, store accounts and credit cards.
4. Annual expenses. These are expenses that you do not pay every month for example a car service, a holiday or TV licence. You have to save up for them every month.
With the money that is left, you can spend it on “Additional Expenses”, which also has 4 categories:
1. Save. You need to save every month to build up an emergency fund and to reach short to longer term goals. Aim to save between at least 15% and 30% of your income.
2. Entertainment, hobbies and luxuries. Make a list of everything you want to do and then prioritise. You will not have enough money for everything you want to do, for example you may only have enough each month to go to one movie, get 3 DVD’s, eat out twice of R115 each and guitar lessons every second week.
3. Give. You can decide to, for example, give a fixed amount or a percentage of your income to recognized charity organisations that depend on donations to continue their work.
4. Additional payments on debt. Paying the minimum amount due on loans, store cards and credit cards will help you avoid a bad credit rating but you need to pay off extra to get the debt settled sooner. Aim for at least three times the minimum monthly amount.
Here is an example of how a basic budget will look like:
Income after Tax 10,000
Minus : Expenses 9,000
Basic Living Expenses 5,850
Basic Groceries 1,200
Rent & Electricity 1,800
Debt (minimum payments) 1,000
Provision/saving for annual expenses 1,000
Donation to Charities/Church 200
Savings : 2,950
Emergency Cash Fund 750
Short Term Goals 700
Overseas Holiday 750
Money left after Expenses 1,000
With the money that is left, you can now save more, pay extra on your debt or buy clothes or other luxury items.
For a healthy and balanced budget, you need to follow 6 principles. As a financial planner with many years experience, I can guarantee you that if you follow these principles, you will experience more and more financial freedom every year.
1. You must track your spending carefully and analyse your spending habits.
Analyse your current spending by keeping all your slips for at least three months and list them on a spreadsheet. Be very specific. Do not only list items under “Food” but split them into basic groceries, take-aways and eating out. If you buy clothes, try and split between necessary purchases (like socks and schoolclothes) and nice-to-have purchases. Also list your cash withdrawals and what you spend the cash on. Track your bank charges. This will show you where you overspend or if you do not save enough.
2. In a healthy budget, your monthly income must always be more than your monthly expenses.
When your expenses are more than your income, you start making debt. If you continue this pattern, your debt will grow with more than what your salary or income grow with. This will work against your budget and your financial dreams over the long term. In order to keep expenses lower than your income, you need to know how to prioritise, which means what to pay and what to leave. You can always re-prioritise your expenses as your income grows.
3. You must stick to the budget no matter what.
Make a conscious decision to stick to a budget except if there really is an emergency. It is a decision you make with your head and not with your emotions. Basically, if there is not any money left for the month for any new expenses, then you go without it! To stick to a budget requires self-control. This means you know how to say “no” to what you cannot afford and try and find out what the reason is behind your spending patterns.
4. Always avoid unhealthy debt.
Debt is not a sin in itself but it’s when it starts controlling you, that it becomes unhealthy. Also try not to continuously make debt for luxury items. Some debt can actually help to save you money, for example buying a fridge can save you regular trips to the shops, that only results in additional fuel or transport costs and you end up buying more than you need.
5. Adapt your lifestyle to your income and be prepared to make sacrificies.
A healthy and balanced budget may ask you to make sacrifices in the short term. If you cannot afford living on your own, then you have to stay with your parents or share accomodation with someone else. If your friends earn more than you, you will not be able to do everything they do every month. Your income will greatly determine your budget and financial decisions.
6. Stop feeding the spirit of entitlement and make it your aim to increase your income.
Entitlement means that you feel you have the right to something. This attitude will cause you to feel entitled to having things you cannot afford; make too much debt; be jealous of what others have or to compare yourself with other people. The only way to have more money available to save and spend is to work hard, gain experience and be committed to your job so that you will be considered for promotions or salary increases more regularly.
Setting up an emergency fund.
A budget is only the first step in developing a financial plan for your life. When your debt is under control and you are used to living with a budget, your emergency savings will grow. An emergency fund are cash savings that you have quick access to.
To have an emergency fund helps you not to make excessive or unhealthy debt when unforseen expenses arise, protects your credit record and is required to cover what insurance policies may not cover. Examples of true emergencies are :
• you or your spouse or partner become ill and have more than average medical costs;
• you lose your job and need to pay your basic expenses and minimum payments on debt until you find a new job; or
• your car breaks down in between its regular services and you cannot cover the cost of repairs from your normal monthly income.
Once you have a big enough emergency fund (between three to six months’ income), you can start saving towards your financial goals (whether short, medium or long term goals).
A budget leads to less financial stress and financial freedom
To live without a budget or with unhealthy debt, can cause a huge amount of stress that leads to health and relationship problems. If you are a parent, it also negatively influences how your children will one day view money, debt and saving. The good news is, as you live within your means and see your savings grow, you will worry less, have less financial stress and start to experience true financial freedom!