Access to credit is relatively easy. Your bank is quick to provide you with a credit card pretty much as soon as you leave school. It’s no wonder so many South Africans get used to buying things they want on credit. That’s often where the Debt Spiral begins.
If you are struggling with your finances the first thing you need to do is to draw up a budget. Only once you know exactly where your money goes each month can you make changes to your spending behavior. These may be small changes to start but will add up in the long term. The basic principle of a budget is to make sure you have more money coming in each month than going out.
But how do I start a budget?
Step 1: note your net income
This step includes finding out how much money you take home each month after tax has been deducted. If you have a partner or family member, that is relevant to your budget, you can include their income to your monthly household income.
Another factor to consider is if you have any other income from hobbies or a side business.
Step 2: Track your spending
You need to track what you spend money on, whether it is bought on cash or credit. This way, you can track what you tend to spend the most money on and where you can cut back on spending. This will also tell you if you are spending within your means.
Now you need to decide what you can cut costs on. You are most likely not able to cut costs on you fixed costs like your expenses such as bond or car payments. You can look to your variable costs, such as entertainment and groceries which change each month for areas to cut back on.
Step 3: Set goals
It is always helpful to have a list of your goals as this gives meaning and purpose to how you use your hard earned money.
- Short term goals should take no longer then a year to achieve
- Long term goals such as saving for retirement or your child’s education takes time to reach
Remember that goals do not have to be set in stone, but identifying your priorities before you start planning a budget will help. For example it might be easier to cut spending if you know your short term goal is to reduce credit card debt.
Step 4: Make a plan
Use your previous identification of your fixed and variable expenses to predict what you will need money for through the month. Fixed expenses should be easy to predict. You can use your past spending habits to estimate how much you will need for your variable expenses.
The hardest step is deciding what you NEED and what you WANT. It is difficult to let some luxuries go, but just be honest with yourself, it will only end up benefitting you and your future.
Step 5: Adjust your habits
Once you have completed the above steps, you have what you need to create your budget. After documenting your income and spending you can start to see what you are spending too much money on. This will help you to realize what you can cut back on so that you can work towards achieving your goals.
If you do not have enough money freed up by the end of your budget, reevaluate your spending. Be harsh on yourself. Start asking yourself the hard questions. Do you really need to spend money on, for example, going to a movie instead of watching TV at home? Do you really need the fastest internet connection available?
Step 6: Keep checking in
Check your budget on a regular basis to make sure you are sticking to it. Check it many times during the month. The best way to stick to your budget is to check your budget before you buy something to make sure you can really afford it.
Making yourself a budget is the best way to work towards achieving your goals. It is also the best way to get out of debt. Your budget is a way to support and motivate you constantly towards achieving your goals and achieve financial wellness.
Here’s a handy template to help you get started (need to see how we load up the excel sheet)
So You Have a Budget – What Now?
The budget is an invaluable tool to support you in achieving your goals and it is important that you always keep your goals handy and written down somewhere for you to see. This should support and motivate you to stick to your budget so you can achieve your personal goals and ultimately achieve financial wellness.
If your budget shows that a significant amount of money is going towards servicing your debt or you find you’ve missed debt repayments, give us a shout as we may be able to help.
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