By Sydney Sekese, CFP® professional and member of the Financial Planning Institute
I am writing this article as we say goodbye to the youth month which is celebrated uniquely due to limited social interactions compared to the past. Another unprecedented event that would be facing South Africans at the time of writing, is that government would be revising the budget midyear due to an economic and health crisis.
As individuals, it is prudent to review our personal budgets. This will improve awareness of our financial matters with rewarding benefits in the future. Financial awareness starts with understanding your current situation. For this, you have to take a very close look at how you are performing financially. Plan, plan and then….plan a little more. Once you are aware of your financial status, look at the situation in a way you would look at a soiled cloth. A budget acts like a detergent to clear the path towards a rewarding future.
You could adopt the “budget to zero” approach. What does this entail? Telling all your money where to go means you’re in charge of it. You own it instead of the other way around. Practically speaking, here’s how you create a zero-based budget:
- Add all sources of income.
- Type in your fixed expenses, like bond or rent, utilities, food and transportation.
- Then type in common monthly expenses, such as restaurants, entertainment and clothing.
- Check your past budgets or bank statements to get an idea of what you typically spend.
- Give every Rand spent a name, meaning all your income has a place in your budget. If there’s still money left after you’ve entered all those expenses, put it toward your current money goal, like paying off debt or set up an emergency fund.
You have to get real with yourself. And you do that by reviewing your spending habits. That “gum-buying” routine, drive-thru coffee habit, or sock obsession could be costing you some serious money that would be way better spent on your current money goal.
Be honest with yourself about places you overspend. You either need to cut back or think about upping a budget line. But, remember, if you spend more in one spot, you have to spend less in another. It’s the circle of budgeting.
Adjustments will and must be made as you budget. Don’t freak. Lots of people think a budget is set and can’t be adjusted. This is your money. And you’re the boss of it. That’s what a budget does. It puts you in charge. You will need to adjust when a bill is more or less than what you planned. Moral of the story is: Don’t be afraid to make adjustments. Just keep the goal of spending less than you make a key objective. That’s how you succeed with your money.
Put in a budget line for fun things. All work and no play makes you a dull, angry, frustrated, back-sliding budgeter. Of course, don’t go crazy. But there are ways to have fun and even reward yourself on a budget. And it’s easier to stay on track when the track offers one fancy coffee a month, and that extra foam bath.
This leads me to a prudent approach towards money management: This involves Understanding the difference between needs and wants. A fancy coffee, for example is a want and not a need. There could be other items that are blurry. If your shoes are literally falling apart, you need new shoes. But that red leather design jacket is clearly a want. We budget for both needs and wants, but needs get the priority.
Financial awareness and responsibility is important because it impacts your future. Making the right decisions early in life concerning your money, can help you become financially independent and live a comfortable and sustainable life now, and after retirement.
An article I read the other day encouraged me to imagine that for one month I did everything right financially. And then imagine I did that two months in a row. How much better off would I be if I did everything right three months in a row? What about six months or a year?
Three simple steps for a perfect money month include the following:
- Put the first money that leaves your account towards your future.
- Look at your money: both your overall portfolio and your expenses.
- You don’t spend the money you put towards your future that month
You will make mistakes. We all do. And it generally takes three months before you get the hang of this budgeting thing, so be kind to yourself both at the start and throughout your new budgeting lifestyle.