With the start of the new year, this is the time for us, as women to review our goals for the long-term, but also set short-term goals for the year ahead. Many people also look at the best ways to get control of their finances to achieve these goals. The first place to start is your budget. In this article, we provide five steps to help you draw up a detailed budget for the year ahead.
Step 1: Look at your current expenditure
Many people start a budget by considering what they would like to spend or what they think the ideal expenditure is per lifestyle item, but the best place to start is to first consider what you are spending at the moment. Take your last three months’ bank statements and categorise each expense. Try to be as detailed as possible.
For example, list food separately as “groceries” and “takeaways”. List entertainment separately as “eating out” or “activity”. Try to avoid categories such as “miscellaneous”. Those tend to become black holes for expenses we try and hide away from. These are your expenses which you are working on improving for yourself. Be as honest as possible.
Step 2: Categorise and then prioritise
In this step, you are going to split your expense categories into needs, debts, and wants. You can go even further by splitting the “wants” into non-negotiables and luxuries. Let’s face it, there are things that we as humans can survive without, but there are also things we need to help maintain our quality of life. This usually differs from one person to the next, based on what our priorities are. Separating your expenses will help you to determine where you have some room to work with every month.
Step 3: Assess income vs expenses
In this step, deduct your debts and needs from the monthly income that you receive. If you have a negative balance, then your “needs” should be re-assessed. This means that you are living above your means and your lifestyle needs to be reviewed. This is not an easy part of the process, and many individuals tend to stop the budgeting process here. Remember what you are trying to achieve and the goals you have set for the year. Sometimes, when we investigate further, we realise that there are many things we buy regularly that we can do without.
On the other hand, if you have a positive balance, then your income is sufficient to cover your needs. The value of this balance is also important. If you don’t have much left over each month, it is still recommended to review your lifestyle and regular expenses. That will free up more cash every month to do the things that you would like to do.
Step 4: Make provision for some luxury spending
If you have a positive balance in step 3, allow some spending for entertainment and the things that bring you joy. Remember to ensure that you are not spending more than you earn. It is important to assign value to your luxury spending and to avoid being spontaneous, as this often results in a higher cost.
Entertainment can cost you R200 or it can cost you R2 000, depending on what you are doing. Allocating value to entertainment can help you to plan activities that will stick within your budget. If you do have something bigger that you wish to do that will exceed your monthly allocation, it’s important to bear in mind that a sacrifice will need to be made in another month.
Step 5: Draw up your fixed budget for the year
This is where you are going to put it all together. List your debts first. These are financial commitments that you cannot miss to maintain a good credit record. Then list your needs, which should be your average expenditure over the last three months that you have reviewed and refined. Then list your luxury spending value. You should have a balance remaining and this entire amount should be allocated towards savings. The amount saved can be used for holidays, major car services, or lump sum payments towards debt.
Everyone’s budget will differ depending on their lifestyle, circumstances, and available income. Budgeting is an important aspect of one’s financial planning and sets the foundation for many decisions made in a financial plan. Seeking advice and assistance from a financial planner can add value when embarking on this journey, see www.fiscal.co.za
