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“I know, a budget can seem daunting,” says Cherise Enslin, financial advisor at NLD Independent Financial Advisors. “The mere fact of looking into how you spend your income and putting it into the best use possible seems like a huge task. But what if we rather call it a spending plan and tell you there are many ways to make it your own and put you in a good financial space… would you be open to talk?”
Um, yes please. In fact, we’re so keen we’ve asked Cherise to take us through the steps you need to take to create a good, solid budget that’ll serve you not just in theory, but in real life too. Take this easy challenge and we guarantee by the end of it you’ll have a workable budget that’ll stand you in great financial stead for the future.
STEP 1: Make a list of all your income streams
This can include:
- Employment income (salary)
- Rental income
- Any other income, for example a trust, investment portfolios, etc
- Any income that you may receive from your “side hustle”
STEP 2: Make a list of all your expenses
Print out your bank statements of the last six months, grab a glass of wine and sit down and work through it.
Separate your essential monthly expenses from non-essentials.
Essentials (non-variable) could be:
- Debt repayments e.g. mortgage payments and car loans
- Rental expenses
- Insurance premiums – more on this below
- Debit orders to investments/savings e.g. retirement savings, education savings, emergency savings
- School fees
- Rates and taxes
- Internet, cellphone, etc
- Medical aid
Essentials (variable) could be:
- Basic entertainment
- Basic clothing
Non-essentials could be:
- Branded clothing
- Excessive entertainment
- Dining out
When it comes to varying incomes and expenses, work with an average over, say, 3 months to get a feel for your spending patterns.
STEP 3: Income less expenses
Once you’ve listed all of your income sources, and everything you spend money on (be honest here!), look at what the difference is.
OUTCOME 1: You’re spending more than you’re earning
You have two options to solve this problem – increase your income or decrease your spending.
Increase your income:
You want to increase your income, but are way too busy at work and with kids? There are easy ways of making a passive income – for example, jobs that take very little time to perform, like running an online store where you resell products that are usually more complicated to come by (start your own small business), or you can become a representative/agent of an established business and build up a client base to sell the products to in your free time.
Decrease non-variable essential expenses:
When it comes to insurance premiums and medical aids, for example, make sure you have the best value-for-money products. Ask you financial advisor to shop around for you. Get quotes and consider the difference in benefits/cover for the difference in premium.
Another job for your financial planner is to make sure you’re insured sufficiently, but not over-insured. You can spend that additional bit of premium elsewhere. Note: Do not cancel these insurances unless your financial planner has done the full analysis and you fully understand the implications of the cancellation – also be aware of penalties.
If you have a lot of debt, pay off the debt with the highest interest rate first. Credit cards usually give you a certain period of time (varies from bank to bank) before charging high interest rates, so when you use this facility, use it in a way that you can pay if off before the interest is applied. If you have car loans, mortgage bonds and clothing accounts, restructure them to pay the ones with the highest interest rates off first – you’ll save money in the long run.
Decrease your variable, essential expenses:
Save on fuel by organising car pools to work, or to get the kids to school. Budget for clothing you need – plan what to buy each month to stick to this limit.
Decrease your non-essential expenses:
It’s hard, but if you’re in the red, you do need to try to keep this to a minimum, or eliminate this, at least until you are in the positive again and have a budget that can handle luxuries like this.
Tip: Take advantage of tax relief opportunities
For example, if you contribute to a retirement annuity (RA), you will effectively be charged on a smaller income amount (a calculation on your income applies to this). Think of it like this: You are either giving the Receiver more money, or you are contributing to your retirement. Another example is to utilise a tax-free savings account (TFSA) to which you can contribute R36 000 per annum and not be taxed on the returns you get in it. Once again, this is a great time to get your financial planner on board.
These steps may seem overwhelming and realising your actual situation may seem a bit scary, but identifying the problem is the first step to success. Starting good habits and having a strict (but realistic) spending plan now will get you out of the red sooner than you think.
OUTCOME 2: You’re earning more than what you spend
Well done! It’s a big accomplishment getting here – and staying here.
With that said, all the above will still apply. If you can save money with the above tips, you’ll have even more funds to invest now to build a better future for yourself.
Secondly, earning more than what you spend means that you have a surplus. What are you doing with your surplus? You might be spending it on unnecessary things (oops).
Ask yourself these questions:
Are you maxing out your retirement contributions to get an even better tax rebate? With current legislation, you can contribute 27.5% of your income and then deduct it from your taxable income for tax purposes. Bonus!
Are your emergency fund levels where they should be? A good place to start with is to have 3 to 6 months’ salary saved in an easily accessible investment for when those unexpected and unbudgeted expenses arise, like appliances breaking, a sudden car repair or retrenchment.
Are you contributing enough to your child’s education fund? Your financial planner will be able to do a calculation based on your children’s age, qualification goal, etc. They can tell you how much to contribute to reach a certain lump sum from which to pay for the university costs.
If it’s a rare “yes” to all of the above, it’s time for you to put that money to good use and make it work for you to realise your desired lifestyle. This is the process of deciding what you want from life in a deeper sense and making your budget work for you to have a great balance and live the life you want to live.
If you’d like some help to achieve all of the above or for more advice, get in touch with Cherise.