Budgeting – Why and Where to Start?

Want to clear a room at work or home? Mention the phrase “I think we need to look at a budget”. Very few people enjoy the thought of budgeting, let alone the process of drawing one up. Ironically it can be the one thing that decreases stress, relieves tension in a relationship and gives you the freedom to accomplish dreams or enjoy guilt free treats.

What Budgeting Means

The budgeting process is about creating a plan to organise and track your money, as well as improve your financial situation. It allows you to see what you can do in the immediate future. In addition, how long and how much you need to save in order to purchase or do something. Essentially, budgeting can be described as balancing your income and expenses.

“Budgeting is about balancing income and expenditure.”

Why Budgeting is Important?

Budgeting can be seen as a dreaded task or reframed to be an exciting plan. To understand how budgeting can be enjoyable, it’s important to know why you’re budgeting. Budgeting makes it easier to achieve financially linked goals. Like that holiday you’ve always wanted to go on or the new car you would love to buy.

“Having a budget can increase your financial freedom.”

The primary reason why budgeting is vital, is that it better ensures that you’re in a position where you have money for what you need and want as well as the unexpected. It can also assist you with better debt management and provide a spending plan. Thus, keeping you free from unnecessary debt.

Budgeting – Where to Start

There are various ways to approach a personal budgeting exercise. For some a traditional detailed budgeting approach, with set amounts and categories, works well on a monthly basis. Others adopt a Pay-Yourself approach to monthly budgeting. Alternatively, you may decide on a mixed budget approach. Using a detailed budget approach when you need to be extra vigilant with cash flow, so you can embark on a specific project, and a Pay- Yourself approach in general.  The important thing is to pick an approach that works for you and consistently stick to it. The goal is to have control over your finances so that you can enjoy life even more than you did before embarking on your budgeting exercise.

The Traditional Detailed Budgeting Approach

1. Calculate Your Income

Write down your take home income. This is the amount that you actually receive after taxes from your employer. If you self-employed or your income fluxgates, then take an average over the last year. Alternatively, use the lowest amount in the last 6 months.

2. Calculate Your Savings

How much cash do you have? What money do you set aside every month? Did you have any left over at the end of the last month? Do you have investment accounts?

3. Categorise Your Expenses

Write down all the expenses you can think of starting with non-negotiables like rent/mortgage, medical aid if you have. Then add in all your daily expenses. For example, food and transport. Organise them into categories and next to those with fixed expenses add the amount. For those that vary, estimate how much you spend. A great help for this part of the exercise is to look back on a few month’s bank statements. That’ll help you remember things you’ve forgotten as well as realistically estimate variable expenses. You can keep things easy by having three basic categories – Necessities, Wants & Saving. Then, it’s helpful to subdivide those three categories into further groups.

4. Evaluate Your Spending

Part of budgeting is to take an honest hard look at what you spending to see if your total expenditure is more than your income. This means that if you are overspending you can work out where to cut down or you may find you could allocate more than you expected towards something specific.

If you looking for a good place to start, when you figuring out how much of your income to allocate to which category, then try follow the 50/30/20 principle. Allocate 50% of your take-home to necessities (rent, transport…), 30% to your wants (entertainment, eating out…) and aim to save at least 20%. Remember that each person’s wants and necessities may vary. So, while chatting it over with someone is helpful, in the end it’s still up to you to decided what goes into which category.

Reviewing Your Budget

It’s recommended that at least once a month you look at your expenditure and tally it against your budget. Tweak things as you do your reviews and over time you’ll understand your spending habits better, have improved control over your finances and be able to watch your savings! Soon what wasn’t quite possible could be a reality and you might just be packing your holiday bags sooner than expected!

How to track Your Expenses

There seem to be a million and one budget programmes, books, courses and apps, all promising to help you easily and efficiently track your spending – so how do you choose? In the end it comes down to what is most convenient and works for you. Some favour an app linked to their bank account that automatically categories purchases. Others prefer to keep their slips and enter them into excel sheet at the end of the week or alternatively they choose to keep it old school and write it up in a ledger or notebook. The trick is to remain consistent in what you choose to use, entering purchases against its category. Then reviewing things to see how much you have left to spend and if you need to make changes before or at the end of the month.

“Consistency is key to successful budgeting.”

The Pay-Yourself Budgeting Approach

When following a Pay-Yourself budgeting approach what you need to do is decide how much you want to put aside for pension, your emergency fund and any big purchases you have in mind. Then have this amount transferred out of your account as your money comes in. What’s left in your account is yours to spend however you want. Remind yourself that out of the remaining amount you still need to cover your basic living expenses like rent and transport. So even though you not allocating and tracking the amount you “paying” yourself into spending categories, you will still need to be mindful.

3 Reasons why Budgeting Doesn’t Work

1. The budget you’ve drawn up is complicated because it is very detailed and so takes too much time to use
2. They can cause fights in relationships, especially if your partner has a different financial perspective
3. You have to face up to some harsh realities and make changes you’d rather ignore

In the world of budgeting – one size does not fit everyone. Keep to what makes sense to you, be honest about the numbers and consistently stick to a system that you know you can manage. Then enjoy the freedom that comes from knowing your finances.

The work of professional coaches involves encouraging people to break down barriers, unlock their inner potential and plan for their future. If you are interested in pursuing a career in coaching, SACAP offers a range of coaching courses, including part-time and full-time as well as online options. For more information, enquire now.