If the government managed its money the way many of its citizens do, the country would be in serious financial trouble.
The budget is one of the cornerstones of the government’s fiscal policy, setting out how income raised through taxes is to be apportioned on housing, roads, policing and myriad other vital infrastructure and services.
Yet while on budget day the country waits to hear how Finance Minister Trevor Manuel plans to spend our money — and whether he’s going to put a bit more back in our pockets by way of tax breaks or reducing income tax — far too few of us consider taking a leaf out of his book and preparing a budget of our own.
In fact, all too many households have little idea what their monthly expenses are. They buy non-essential luxuries on credit and then take out loans to make up the shortfall.
Consequently, like some countries, they find themselves in a situation where they spend all their disposable income servicing debt, rather than saving or investing to establish some financial independence. And, unlike struggling countries, they’re unlikely to be granted debt relief.
Old Mutual Bank’s Ben Stander says a monthly budget should be the basis of any household’s financial planning — and it isn’t that difficult.
Start with your salary slip, which should list your gross income and all the expenses that are deducted from it, such as medical aid, pension and tax. What is left is your nett income.
Then work out your fixed expenses. There are regular payments and typically include items such as a home loan, car repayments or school fees.
Next list your variable expenses; the things you need to pay for but which tend to change every month. Look at old accounts or receipts and try to work out a reasonable average for costs such as electricity, transport and food. It is important to be honest. If in doubt, think like a good finance minister and be conservative. Rather overestimate than underestimate a cost — this way you’ll have some fat in the budget rather than be left short.
Finally check your financial records for the past year or try to cast your mind back and list any irregular expenses. These could be medical costs, car repairs or other expenses that tend to crop up from time to time.
Now weigh the expenses against your nett income. If you have a shortfall or what finance ministers refer to as a deficit, you’ll have to cut back on expenses.
Non-essential items such as entertainment are an obvious place to start, but you should also see if you can reduce short-term debt as this is usually costly to service because of the high interest rates. It tends to include things such as shopping accounts or short-term loans.
You may also want to consider a debt-consolidation facility on your home loan. This enables you to manage all your debt, such as bond, car finance and personal loans, from a single account at a competitive interest rate. But remember it is not a good idea to consolidate short-term debt and pay it off over a longer period.
Once you are on a sound financial footing, you should try to put some money away each month. As a rule of thumb, you should aim to save between 10% and 15% of your nett income. This is over and above what you are saving in your company pension or provident fund or investing in life assurance or retirement annuities.
Stander suggests a sound monthly budget should:
- first cover essential fixed expenses;
- provide for essential changing expenses;
- ensure there is enough to cover regular or unexpected expenses;
- save enough to meet future goals; and
- leave something for little luxuries.
“But the most important thing is not to procrastinate. Setting a monthly budget can be hugely empowering, giving you a tremendous sense of control over your financial affairs. It is also a massive first step on the path to long-term financial security,” he says.