Wealth is created by employing everything that you don’t spend and investing it appropriately for the future; and contrary to popular opinion, it’s not what you earn that matters, it’s how you spend what you earn that really counts. It goes without saying, therefore, that creating a bulletproof budget is the first step towards creating sustainable, long-term wealth. In these times of crisis and uncertainty, it’s more important now than ever before to have a bulletproof budget in place.
A touchstone for financial decision-making
In the late 15th century, gold and silver were rubbed against black quartz – the ‘touchstone’ – as a way of determining the purity of the metals. The streak left behind on the touchstone provided a good indication as to the quality and purity of the metal being tested. By analogy, your budget can be considered a touchstone for all your financial decision-making. Using your budget as a reference point, you are able to evaluate your expenses, purchases and money decisions, and test them against the goals and objectives you would like to achieve. Your budget, or touchstone, is a measuring tool with which to determine how your money decisions will impact on your future financial security. If fully aligned with your goals and consistently employed as a touchstone, your budget should provide a means to more intentional spending and saving of your money.
Proactive money control
In the absence of a budget, your money will be accounted for retrospectively. In other words, at the end of each month you will merely track what you spend your money on and how much money you have left, if anything. To create a bullet proof budget, you will need to proactively account for every Rand that you earn before the month begins. This will give you the opportunity to assign a ‘job’ to every Rand that you earn. This task can be more challenging if you earn an irregular income, have multiple sources of income, or earn fluctuating commission. However, by making safe assumptions and doing careful forecasting, you will be able to take proactive control of your inflows. Proactive budgeting is about employing your money to work for you on purpose.
Stress-test your expenditure
Once you’ve proactively allocated a ‘job’ for your net earnings, remember that you will need to stress-test the theory against your actual expenditure. Life is not static and nor is your budget, so you will need to cross-check your budget to your bank statements to ensure that the values you’ve built into your budget are realistic. When stress-testing your budget, consider:
Your fixed expenses
Your fixed expenses allow you to make fairly accurately predictions but be sure to consider some curve balls. For example, although your monthly petrol costs tend to be fairly constant, a weekend away, family emergency or vacation may throw your fuel budget out of kilter. Consider making allowances under your intermittent expenditure for occasions where you might spend extra on petrol.
Electricity, clothing or home maintenance are examples of variable expenses that can fluctuate from one month to the next, and it is important to buffer your budget against these variables. One way to do this is to allocate a value that is slightly higher than what you anticipate. For instance, if your electricity bill in summer is normally R500, allocate a value of R550 just in case. This will give you some breathing room in your budget, bearing in mind that you can always re-direct any surplus funds at the month towards paying off debt or boosting your savings.
The best way to manage intermittent expenses is to use a year-planner to map out future costs such as new tyres for your car, birthdays and anniversaries, car services, pet check-ups or vaccinations, and so on. A year-planner will help with your forecasting and will further fortify your financial position.
If you need to reduce expenditure, attack your discretionary spend first in order to secure a few ‘quick wins’. Review all your subscriptions, check whether there is a cheaper gym contract available, consider an alternative DSTV package, or commit to entertaining at home rather than eating out.
While a budget should be bullet proof it should not be cast in stone. As your personal circumstances change, so too should you budget. Poor market returns, unrealistic goals or expectations or changing jobs may necessitate that you adjust your budget. This could entail revisiting your goals, shrinking your expenditure, increasing your earnings, or a combination of all three.
Preparing for the unexpected
Having an emergency fund is one of the surest ways to buffer your budget against large, unforeseeable expenses, but it’s important to set the level of your emergency fund correctly. How you need in your emergency fund depends on a number of factors, so give careful consideration to your unique situation before assuming that three months’ income will suffice. Do you have pets? Is your car out of warranty? Do you work in a risky job industry? Is there a possibility of retrenchment or job loss? Do you partake in extreme/dangerous sports? How old are your appliances? Do you have expensive hobbies? Are you comprehensively insured? All these factors will impact on the level of emergency funding that you will need to put in place.
Shining a light on bad spending habits
If you’re reviewing your budget and tracking expenses regularly you will be in a position to identify bad spending habits fairly quickly. When you’re working hard and have deadlines to meet, convenience spend is easy to justify – although it can wreak havoc with your budgeting. If your spending is over-budget, start with examining your convenience spend. Hail riding, online shopping, take-away meals, outsourced laundry, garden services, ready-made meals and coffee-on-the-go costs have a way of sneaking into your budgets and becoming fixed line items without you even noticing.
Realistic goal setting
Setting unrealistic financial goals can put unnecessary stress on your budget and can leave you feeling disillusioned. It is important to set goals that are achievable in terms of your income, expenditure, lifestyle, earning potential and future career opportunities. A good way to avoid chasing unrealistic goals is to first prioritise them in terms of importance before allocating money to them in your budget.
Forward planning and forecasting
When it comes to budgeting, bear in mind that every month is different and comes with its own set of idiosyncrasies such as the festive season, tax year-end, salary increase time, bonus pay outs, planned vacations, deposits and upfront payments, vehicle servicing, or family visits. Forecasting will also allow you to factor in things such as medical aid and insurance premium increases, food and fuel price increases, school tours, weddings and other celebrations. You can also use your forecasting to make plans to re-employ money when you settle debt, pay off your vehicle or finishing paying your home loan.
A mechanism for debt-prevention
Having a carefully considered budget will allow you to calculate your debt-to-income ratio to ensure that you don’t take on too much debt. Your debt-to-income ratio is a personal finance measure that compares the amount of debt you have to your overall income. Financial institutions use this ratio to gauge your ability to manage payment and repay the money you have borrowed. The lower your debt-to-income ratio, the more favourably you will be considered by financial institutions should you need to borrow money in the future. It is also a good way of keeping control of your debt to ensure it doesn’t get out of hand.
An early warning system
Reviewing your budget on a regular basis means you will be alerted to any problems sooner rather than later. Knowledge is power, and if your expenditure exceeds your income it’s important to identify and address the problem as soon as possible. Proactively assigning jobs to your money and then stress-testing it against actual spend at the end of each month means that you will be in a position to identify any anomalies immediately.
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