A budget is the one habit that can change your life

18 February 2019

We’ve all heard about the importance of budgeting at some point in our lives. It’s a word that regularly gets thrown around and while we all know that we should make an effort to budget, but not many of us actually know where to start or how to effectively (and seamlessly) implement this financial tool into our lives. This topic gets put under an even bigger spotlight at this time of year when the Minister of Finance, Tito Mboweni, delivers the National Budget Speech that outlines and balances the country’s income with debt and expenditure. It can all seem very complicated, but you can take comfort in the fact that the way that the Minister of Finance works out the budget for the country and the way that you do your personal budget is based on exactly the same principles.

We want to help you take control of your finances and get the most out of your money, so we spoke to Craig Pheiffer, Chief Investment Strategist at Absa Stockbrokers and Portfolio Management, and got him to spill the beans on everything that you need to know - from where to start with your budget to the tricks and tips that he’s accumulated over the years.

First things first, why all the fuss about a budget? Is it really that important? Well, yes. As Pheiffer explains it, there are very few people on this planet who have unlimited financial resources, which means that your income and money are both limited and you have to be very particular and calculated about how and where you spend it – otherwise it’s going to run out. “Think of time. It’s also limited. So, if you have 10 tasks to get through in a day, you’re going to plan how much time you are able to allocate to each one of those specific tasks during the day and what doesn’t fit or get done will have to wait until the next day. A budget is similar because you only have a specific amount of money, with a specific list of things that have to be paid. This just ensures that you put what you have to the best possible use,” he said.

Now that we know what a budget is and why it’s important, let’s talk about what it isn’t. According to Pheiffer, he’s come across many misconceptions, but the most popular one is that people think it’s difficult. “People are very fast to say ‘I’m not an accountant so I can’t do budgeting’, but at the end of the day it’s actually very simple because you aren’t working with many variables. I think a lot of people get put off by the fact that you have to work with numbers and it kind of just makes their minds switch off. But your income is limited and your expenses are usually very specific - and also limited - so it cuts out many variables,” he explained.

“People also seem to think that budgeting means drawing all your cash and putting it into different envelopes – one for groceries, one for transport or fuel, etc. This works great for some people, but it doesn’t necessarily have to be this much effort.” Pheiffer suggests that a great starting point is to just start writing down how much money you’re getting in and deducting everything that you’re spending from that amount. To make things even easier, you could download our Budget Sheet, fill in the amounts, and watch magic happen as the calculations are automatically done for you.

What you definitely also don’t want to do, according to Pheiffer, is just accumulate slips in your purse and try add all of that up at the end of every month. “It rarely works, because you just can’t really see the full scale of how it impacts the bigger scheme of things.”

That settles it - winging it is not a solution in the short or long term. So, where should you begin? Pheiffer explained that you can become a budgeting pro by following these simple steps:

  1. Determine and understand your full income 
    -Do you have different sources of income?
    -What is the amount of income that you have when all your sources of income are    accumulated?
    -Does your income vary from month to month based on interest earned at work?
  2. List your expenses 
    - What are you spending money on every month?
    - How much money do you spend on these things?
    - Which expenses are fixed (think debit orders) and which expenses are flexible?
  3. Divide your expenses into short term, medium and long term
    Short term expenses are things that you pay for every month - such as groceries, petrol/transport costs, your medical aid, insurance, rent etc. Medium term expenses refer to the likes of putting money away every month with the aim of going on holiday at the end of the year. While long term expenses refer to retirement plans, fixed investments, etc.
  4. Start balancing your budget
    Your long-term expenses should be set aside first. It’s critical to invest a portion of your monthly income and secure your financial future into retirement. Your key short-term expenses should also be subtracted at the outset so that your current livelihood is secure. What’s left should be considered for your medium-term expenses and saving for that holiday in Margate or Malaga. Make sure that you don’t budget to spend every cent of income – you need to have a little contingency fund to cater for unplanned expenditures such as a washing machine repair, a leaky roof or a vet bill for your sick puppy.
  5. Keep tweaking and adjusting
    It’s a constant process that you might not do perfectly the first time, but it’s easier to tweak something that exists than it is to keep guessing where your money is going and wondering whether or not you’re going to have food at the end of the month.

Pheiffer explained that besides the fact that you’re in control of your money, peace of mind is probably the other biggest benefit of budgeting. “If you know that you’ve planned and you’re able to maintain a lifestyle that’s in line with your limited income, you’re not worried about what will happen next month or whether or not you’re going to be kicked out of your apartment for not being able to pay rent. It also gives you the ability to determine and shape your lifestyle while knowing what you can and can’t do. If you want to buy a car or house, you’ll know if you’re able to and it just makes everything a little less stressful.”

With all of that in mind, Pheiffer added that the biggest trick or tip that he’s learnt is the importance of being disciplined. “If you spend money on something you didn’t budget for, go back and see where you can cut back to make up for it.”

There you have it; hopefully you feel more confident to ease into the habit of budgeting and actually start practicing the “new year, new me” lifestyle that we all keep throwing around. If you have any questions, or if you need further assistance, visit our website or contact us on 08600 08600.

And if you want to fall deeper into the budgeting hole, give our #Budget2019 wrap up.

Disclaimer: The advice contained on this blog is for general purposes only and does not take into account individual circumstances, objectives or financial needs. Accordingly, readers are advised to seek appropriate advice from licensed professionals prior to making any investment, or taking up a financial product or service.