Living from pay cheque to pay cheque is stressful. The days after your money runs out are either ones of deprivation, or ones during which you have to reach out for a loan, or buy on credit.
Credit or a loan is likely to come with consequences, like a high interest rate, that will only make it harder to make it through the following months.
A spending plan or budget is the way to regain control so that you know what you will spend your money on and how it will last the month.
You may think budgeting is boring or a killjoy but you don’t have to let it be an exercise in how to deprive yourself of the good stuff in your life.
Budgeting should rather be about identifying what you need and want in your life and prioritising how to getting it.
For example, if you need to exercise to feel healthier and more motivated, you may be able to do that without incurring the cost of going to the gym. An exercise buddy, a home workout or a run may be cheaper ways of getting fit.
Eating out may be costing you, but is it the food or the social connections that make you feel good? Could you connect more cost-effectively over a picnic?
School fees at a good school may be over-burdening your budget, but are your children getting what you expect from the school? Could a lower cost school with some private tuition or extra-murals fill the same need?
Budgeting should not be like a diet you never stick to. Slashing expenses might work for a while, but if it’s not a way of life you can stick to, you’ll probably soon give into impulse spending.
Instead your budget should map out how your resources can best satisfy your needs.
Where to start
You can use a piece of paper, an Excel spreadsheet, an app or the Smart About Money Budget Planner.
Everyone’s budget will look different, but it should start with a list of your income.
If your income varies from month to month, average it out over the past six to 12 months.
Then list your expenses keeping these categories in mind:
Your contractual expenses are costs that you are obliged to pay.
Contractual expenses include your home loan or rent that you are obliged to pay to keep a roof over your head.
Other contractual costs include your monthly debt repayments and/or rates bills – expenses that, if left unpaid, would affect the quality of your life and probably your credit rating.
Premiums paid for life, disability and critical illness cover, as well as medical scheme contributions and premiums for insurance on your car or home all protect your financial life from unexpected life events that carry disastrous financial consequences.
If you stop these premiums, you may not experience any immediate effects, but it puts you and your family at financial risk.
An accident or health event that prevents you from being able to work for months, or even forever, denies you, and those who depend on you, the income on which you need to live and use for medical care. If you have outstanding debts, you would then be unable to repay these which could see you lose a home or car.
You may begrudge the amount you spend on short-term insurance, but it safeguards your budget and your savings from a financial disaster if you lose your belongings.
Pay yourself firstPaying yourself first means automating the decision to save an amount each month. Setting up a regular transfer to a savings or investment account, commits you to it and living without that money will become a habit.
Knowing you are paying yourself can also help you view your budget positively rather than associating it with deprivation and a bad experience.
Making room in your budget to save and invest may mean you must delay some instant spending, but doing so will enable you to achieve more meaningful spending later in your life.
When you set a goal and save for something instead of buying it on credit, it means you spend less achieving that goal: not only do you avoid paying interest on a loan, but your savings earn interest that works for you.
Your first savings goal should be an emergency' fund that can cover the cost of emergencies that may arise in your life – a family health crisis, a burst water pipe, the excess on your insurance in the case of an accident in your vehicle, a sick pet and even the loss of a job. Read more: How do I set up an emergency fund?
Longer-term goals include saving for your child’s education, for a deposit on a home and for a secure retirement.
Try the Smart About Money Growing my savings calculator to see how much you can save over time or if you want to achieve a savings goal, use the Smart About Money Savings Goal Calculator to see how much you need to save each month.
Discretionary (optional) expenses are those over which you have some control when it comes to how much you spend. Food, clothing and electricity are all necessities, but whether you buy the basics or designer foods and clothes, and the electricity you consume are all things you can, with some effort, control.
You should also categorise some of your discretionary expenses as things you want but don’t necessarily need, like beauty treatments, visits to the hair salon, alcohol, cigarettes or subscriptions.
These are things you can get by without, but they may be important to you in your life. Carefully consider each one and its appropriateness given your financial situation.
Are you able to afford them, but at the cost of paying down debt or saving for retirement? What is more important to you? Could you live without the most expensive subscription package and make do with a cheaper streaming service if it meant you could direct more money to your savings for a goal?
Your first budget is a planning tool. Then you need to monitor your adherence to it. You can add an actual expense column for each month of the year, checking what you have spent against what you budgeted for.
Or you can use an expense tracking service. These services analyse your spending from any bank and investment accounts you link and categorise it for you so you can easily see how your expenses line up with your plan.
It may take you some time to perfect your budget, but if you don’t begin you will never be in control of your money.
Getting it in place builds the cornerstone of the rest of your financial plan. From there you can set goals and start building wealth.
