Budgeting - Where your money goes…(wrong)

*This article was originally published on September 2019 and has been kept in its original form

A definition of a budget is an estimate of income and expenditure for a set period. I read earlier this week that people spend 24 days a month making money, but most people don’t spend 5 minutes to make sure where it is going. However simple this sounds, I find more often than not, that clients and potential clients know exactly what a budget is, but taking the final step to complete this helpful tool alludes most. A clever way to complete the last mile is to employ an independent financial advisor.  

So, what can a budget tell us?  The first thing that a budget tells us, is what are the expenses which run through our account on a monthly basis – and most times these are the expenses we overlook, these need to be reviewed as well, and an independent financial advisor can help you to see if these are still relevant and if you are getting the most bang for your buck. This is also a great time to review subscriptions, are they still necessary, relevant and cost-effective – if not downgrade or cancel subscriptions. This will free up capital to employ elsewhere. Secondly, we can see what are our variable expenses – these are the expenses which we should spend at least the same amount of money on, think groceries, clothing, fuel and entertainment – these are especially important to monitor more precisely because overspending on these is very easy I have had a recent experience with a client when she told me that she spends about R2000pm on groceries, after reviewing her account to track spending and see how accurate this is after doing the budget we found that in 3 months she spent on average around R3500pm on groceries.

This brings us to a very important point – your budget needs to be as accurate as possible, otherwise – garbage in garbage out. Thirdly a budget – after adding income, tax and expenses – will tell us how much disposable income we have left, or put more simply what we have to work with to create future freedom or wealth. After finding out what your disposable income is, you know what you have to work with – I believe that the only way to make a change for the better is to make that change sustainable, elect to save a percentage of your disposable income – eg. 25% , 40% or 70% – and stick to it. Then the next step is to set a review date so that you can track if this saving has been sustainable, and if it was you have the option to increase this amount to reach your goals even faster – and repeat until you find your golden ratio. When we find out how much disposable income we have to use, we can decide how we wish to employ these funds to be optimised for our plans.

Possible avenues to explore here are :

• Servicing/clearing expensive debt – this could free up even more money

• Beefing up Retirement Savings – enjoy the tax deductions

• Creating an emergency fund

• Start a Tax-Free Savings Account

• Start a Unit Trust – great for saving for goals Get in touch to create help create a budget and the financial freedom you deserve.