Planning A Proper Budget (5 Steps)

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Planning a budget seems relatively simple and by following the below guidelines it is. Sticking to the budget and tracking same on a monthly basis takes effort and commitment to your financial goals. This is where most people fall short. Overcome this by setting a deadline i.e. the first Friday of each month, to track your spending of the previous month in order to ensure you kept to your budget, or make the necessary adjustments to this month’s budget to rectify last month’s overspending.

Step 1 – Goal

As the old saying goes “failing to plan, is planning to fail” so start with the end goal in mind, whether that might be getting out of debt, increasing retirement savings, or whatever. Your goal is just as important as your budget as this will be your motivation to stick to your budget. Be specific in your goal, and add a time limit to it. It is often also beneficial to add a reward to your goal which will only further help with motivation. Should it be to settle your debt, add a reward to it that once you have settled the debt, you will go on a trip for example.

Step 2 – Income

Calculate your monthly income. Should your household income vary from time to time, gather your last 6 to 12 months’ payslips in order to calculate an accurate average income. Take additional income, such as overtime, incentives etc., into consideration as this could amount to a substantial income supplement over a 12 month period. When calculating your income it is often a great creative exercise to identify additional income opportunities you could utilise to increase your household income i.e. part time work or a business you have considered starting on the side. Please do not quit your current job to open a business before you have considered all risks and discussed this with a registered financial planner.  Here is a template to get you started:

Step 3 – Expenses

Calculate your monthly expenses. First you need to think of a scenario wherein you lost your employment and now have to cut expenses to the bare minimum. Make a list of the expenses your family cannot live without also known as a bare-budget. Keep this budget separate as we will use this again later.

Then on a separate list categorise your current monthly expenses. Categorise these expenses into variable and fixed expenses and then further sub-categorise each into different headings as listed below. Use your bank statement to ensure you include all your expenses.

Step 4 – Budget

Compare your “bare-budget” to your current list of monthly expenses to identify expenses which can be reduced to increase the balance left over at the end of the month. This is also known as distributable income. Once you have identified expenses that can be reduced, draft a new budget which will be your monthly goal budget. You will use this budget monthly to compare your monthly expenditure against your goal budget. The additional distributable income can be allocated to your goal you have set before starting to plan your budget. Be sure to allocate a minimum amount to this goal and list the goal under your “fixed expenses”. Change your mind-set to rank your “goal payment” just as important as your fixed payments to ensure you stick thereto. Often people load a debit order for their goal fund to ensure that same gets paid at the same time as fixed expenses. Should you have money left over at the end of the month, you can also add this to your goal fund.

The envelope system still proves very effective for variable expenses. Draw the amount budgeted for your variable expenses in cash and place same in separately marked envelopes for each of your variable expenses. This way once the envelope is empty you know you have reached your budget for that expense and it is easier to track than simply using your ATM card, saving your budget from yourself.

Step 5 – Track

As discussed earlier budgeting is the easy part, sticking to the budget is much more difficult. Monthly or weekly comparisons makes it a lot easier. To track your budget you can use various tools i.e. Good Budget, mint.com, Excel, or for the less tech-savvy a notebook will work just fine. You simply need to track your expenditure versus the budget you have set for yourself to ensure you achieve your goal. This needs to be done at least once a month in order to check your expenditure of the current month and plan for the following month. This is also a good opportunity to get the family involved and discuss the family’s financial position and goal and motivate them by including them in the reward. This way the whole family will work together to achieve the household goal and will not only be one person’s responsibility.

Should you need any advice on planning your budget, feel free to contact our office and one of our financial gurus will gladly assist you.

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