Personal finance is all about finding the best way to make your money work for you. And one of the cornerstones of personal finance is budgeting. Regardless of how much you earn, we all have to budget. But what is a budget?
A budget is telling your money where to go. If you look at your bank statement, it will tell how you how you have prioritized how you spend your money. So at the end of the day, a budget is really just a spending plan: how you allocate your money towards your needs and wants.
Not one method of budgeting will work for everyone but there are several methods to choose from:
1. 50/30/20 Rule of Budgeting
This is one of the most popular forms of budgeting. With the 50/30/20 rule, you allocate your after-tax income in percentages; 50% goes towards necessities, 30% goes towards your wants and 20% toward financial goals like paying off debt or saving for an emergency fund/retirement etc.
This means that if your after-tax income is R15,000, this is what your budget will look like: Needs =50%: R7,500 will go towards Rent/Bond, Transport, and Insurance etc. Wants =30%: R4,500 goes towards eating out, buying books, saving for holidays etc Needs = 20% R3,000 goes towards paying off debt or saving for retirement
2. The 80/20 Rule The 80/20 rule is a simpler form of the 50/30/20 rule of budgeting. With this rule, you save 20% of your income and spend the rest. This works if you struggle with budgeting but you are also not in debt. This rule goes hand-in-hand with the concept of paying yourself first. This means that whenever your salary comes into your account, before you pay anything else, 20% is allocated towards your savings and investments. The rest of the money (80%) that is left, you spend towards necessities and wants in whichever percentage suits you.
3. Kakeibo method Kakeibo – which means ‘Household Financial ledger’ is a Japanese budgeting system that helps you track your spending. The Japanese have successfully used this system for over a century to manage their household budgets. The core of this system is to help you understand your relationship with money as you record EVERYTHING that is coming in and going out! When applying the Kakeibo system, you go back to basics –meaning no apps or excel spreadsheets, just a good old notebook(s) where you record all your income and expenditure.
For this method, you will need 2 notebooks; one where you record your income and expected expenses once a month, and the other notebook (preferably one that fits into your bag) where you write EVERY single expenditure you make throughout the month.
There is something profound and reflective in writing down your expenses by hand. It brings you close to your spending habits. We often lie to ourselves about just how much we spend on certain things; so this system allows you to come face-to-face with yourself and your habits.
At the end of the month, you reconcile what is in the first notebook to the daily expenditure notebook. Hopefully this leads to more mindful spending in the long term.
4. Using tool and Apps
If you are more technologically inclined, you will find that there are many tools and apps available to help you manage your money better, most of them easily accessible on your mobile device. There are various tools including:
Your bank normally has budgeting tools that you can use for free
22seven (www.22seven.co.za)
Stash (www.stash.co.za) etc.
5. Envelope Method
The envelope method is particularly helpful if you are trying to tame wild spending. In 2018, I realized I was spending an obscene amount of money with eating out. So I started using the envelope method to control my spending towards eating out and it worked. With the envelope system or method, you decide which category you want to tame i.e. entertainment or transportation, and then you physically draw the money in cash and put it in an envelope labelled ‘Entertainment’. This means that every time you eat out or go to the movies or take the kids out for ice cream, you only take from that envelope until it runs out and if it does, you know that you have exhausted your funds for entertainment for that month. The envelope system works because there is a psychological effect to holding real money instead of a debit card. Using this method enforces self-discipline because it forces you to really track your spending on each chosen category.
6. Zero-Based Budgeting
This type of budgeting ensures that every Rand is accounted for, making sure that you do not have ‘idle money’! Idle money is money sitting in your account with no purpose. It’s the kind of money where you keep telling yourself that you will save or pay extra to your debts but never do and ultimately, you end up spending!
If your income is R20K for example, your expenditure should be R20K as well; making your ‘balance’ to come to zero, however, that doesn’t mean you have zero Rands in your bank account at the end of the month—it just means you have zero Rands leftover in your budget – every Rand is accounted for.
7. Create your own budget – Excel spreadsheet If you are like me and you prefer to come up with your own excel spreadsheet and highlight the different categories, then this method works. I personally like it because it allows me to categorize my expenditure and enables me to plan ahead. For example, there are fixed expenses that you know you need to take care of every month but there are also expenses that are once-off in your calendar, while others like birthdays gifts and holidays are once-off and you can easily add them in your spreadsheet and plan accordingly.
There are multiple ways in which you can budget, just find the one that suits your lifestyle and financial situation the most.
Which budgeting method has worked for you?
**This article first appeared in City Press
Listeners questions – Retirement, take the cash & run? How to start financial freedom?
This week Maya and Mapalo answer readers questions about retirement: when to take the cash and run or when to buy an annuity, how much you can draw of your capital and why good advice is worth paying. They also give listener Thando, a young student, a few tips on how to start on the road to financial freedom.
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