Your first step towards financial freedom
18 March 2019
A budget is a plan that helps you prioritise your spending, whether it is getting out of debt, saving up for a home or working on starting your own business.
Many people are nervous of setting up a budget and managing their money, yet it can be very empowering. Before starting the process of setting a budget, you must first decide how the budget will help you in achieving your financial freedom. It is important to detail your aims and objectives while realising that sometimes you might need to make some financial sacrifices in order to make your budget work. To make a good budget, you must list all your current expenses. If you are hoping to save some money for the rainy days or save for a holiday, then making a budget is your first step towards achieving your financial objectives and converting them into reality.
We have compiled some effective tips that you can follow to get your budget started and help you start working towards achieving financial freedom.
1. Calculate your expenses
The first step in creating a personal budget is to work out your monthly expenses. You can do this by going through your monthly bills, receipts, bank statements and financial files. Some of your expenses are recurring expenses, meaning that you pay them monthly, such as rent, car repayments or insurance premiums. If you calculate your expenses for the past six months to a year, you can then realistically work out your average monthly expenses.
To calculate your average monthly expenses, you need to add up all the money that you spent in the last six to twelve months and then divide the whole amount by the number of months. When making a realistic budget, try to include all your expenses, otherwise it can skew your planning. Within your expense planning, remember to allocate a little extra money that you can spend on unplanned expenses, such as car repairs. The best rule of thumb, if possible, is to add an extra R1 000 to R2 000 to your expense budget.
2. Determine your earnings
Once you have determined your monthly expenses, now you need to determine your actual income. Apart from your monthly salary, you need to get a correct picture of your income by adding in any extra resources that you will get throughout the year, such as cash gifts, allowance, child support and bonuses.
3. Plan savings and debt payment objectives
If you want to have savings and debt payment objectives, then you need to determine whether you a budget deficit or excess. You can do this by subtracting your monthly expenses from your income/earnings. If you are earning more money than your expenditure, then it will be good news for you. You will therefore have some available money that you can put aside as savings every month or be able to pay off some outstanding debt.
However, if you have more expenses then income, then it is a red flag for you, meaning that you need to cut down some of your expenses. By cutting some of your non-vital expenses, you should be able to save a little money for the rainy days and hopefully prevent yourself from going further into debt.
In order to cut down some of your expenses, you need to track your monthly spending and record it monthly. If you are spending money on some unnecessary items such as snacks or regular takeaways, then you need to try and reduce this expense. An example is if you are spending R50 a day for lunch while at work, that works out to R1 050 a month and R12 600 a year. You can reduce this expense by taking a packed lunch with a sandwich and a snack, which will be much cheaper than buying snacks and lunch.
It is important to try and reduce your expenses to be able to save 10% to 20% of your income for your savings account. You need to also think about ways in which you can increase your annual income if you are unable to reduce your expenses in your budget.
4. Re-evaluate your budget every month
When you are making your budget, you need to make two columns, one is for the amount you aim to spend, and the other column is the actual amount you spent. When you review and re-consider your budget every month, you will start to understand your expenses can often differ from your best-arranged plans. When you come across the consequences of your expenditure then you will come to know the problematic areas. Take time to carefully review these problematic areas and make modifications to fix and improve them.
When people make a budget, they often realise that they are spending more money on various categories than they initially thought. By reviewing their expenditures, they become aware of their spending habits. You should try to maintain your budget by making the smallest improvement to it every month and if you keep doing this, it should result in big improvements to your savings.
5. Keep a record of your expenses and trial progress
The best method to follow your planned budget is to keep a record of your expenses and income. By doing this, you will think twice before committing to the expenses, knowing that it could spoil your budget. Keeping a record will help you to stick to your saving goals.
6. Setting objectives for your budget
Once you have achieved your budgeted objectives that you set, you must then set new objectives. Budgeting is an ongoing process and changes as your life goals and expenses change. Once you meet your savings objectives, consider rewarding yourself. For instance, you can reward yourself by planning a meal out if you achieved your grocery budget each month. Therefore, continuing to set objectives and achieving them will help you to keep moving forward.
To achieve financial freedom, it is important to follow your budget seriously. As with everything in life, it will be OK if you break your budget occasionally but getting back on the track is very important.
Learnalot’s Money Essentials online course will help you understand the importance of managing your money, will teach you the necessary budgeting skills, as well as how to achieve financial freedom. Click HERE for more information as to how you can start making smart financial decisions.