As a responsible and financially independent adult, the ability to live within your means is one of the greatest life-skills you can have. Most salary-earners, however, are often left without cash in their bank accounts long before month-end because of temptation, a lack of financial discipline and no knowledge of budgets.
Without some kind of financial planning you will soon overspend, start buying the wrong things on credit and even taking out loans to make up for the shortfalls. Before you know it, you are caught in the debt spiral – unless you realise that you have worked hard for your money and that you need a financial plan to guide your spending and savings. That is why it is so important to start using a budget.
The value of a budget
A budget will guide your spending in a responsible way by ensuring that important accounts, such as rent and loan repayments, are paid first before you spend money on entertainment and luxury items. For a budget to have any measure of success in your household, it is equally important to discuss the budget with your family so that they get the overall picture of your financial situation and understand the objective.
Drawing up a budget
To draw up a budget you need to add up your monthly income (salary, overtime payments and such). Next you need to add up your monthly expenses (rent or bond, car instalments, policies, school fees, groceries, clothing, petrol, medical bills, telephone bills, cellphone, water and electricity, bank charges, entertainment and such) and your annual expenses (TV licence, car registration fees and so on).
Compare your income and expenses: If you have a shortfall, you need to draw up an urgent plan to decrease your debt and/or increase your income. If you have cash left you are in a position to save money.
Making up for shortfalls
If your expenses exceed your income you might need to borrow money to pay your accounts and loans. This leads to more debt, higher interest, no cash flow, no money for savings or unexpected expenses – and lots of worry. If you are in this position you urgently need to find ways to reduce this.
This is how you can do it: review your budget and look for areas where you can reduce spending. Be sure to differentiate between wants and needs. You can also ask the shop, bank or credit provider to reschedule your debt and
pay off smaller amounts over a longer period of time. Don’t damage your credit record by avoiding your payments, as this will have a negative effect in the long term. Cut down on your spending and avoid banks that charge exorbitant fees. Another solution is to earn more money by taking on extra work if you can.
Saving money
If your income exceeds your expenses you are in a position to save money for special goals, such as a new car or a deposit on a flat or house, or for emergencies, such as unexpected medical bills, a funeral or car repairs.
The only way that most salaried people can obtain a healthy lump sum is to start by saving small amounts every month. Compare the interest rates that banks are offering and open your own savings account. The higher the interest rate, the more interest you will earn on your savings. You will also earn interest on interest (called compound interest), which will help make your savings grow even faster.
It is never too late to start saving and no amount is too small. Financially, this is the most empowering thing you can do for yourself. It takes financial discipline to save regularly and the peace of mind that comes from having money in the bank will always outweigh the stress of worrying about money matters.
Shop around
Financial products can be confusing, which is why it is so important to shop around and get products that best suit your needs. Visit some banks or financial services providers and ask them what they can do for you.
Yolandé van Rensburg is head of communication and public relations at Capitec Bank.