Ah, it’s the most famous (or infamous) B-word out there – budgeting.
It’s been seen as too limiting or too binding, it’s given millions of people headaches, and it’s seemingly caused enough stress and anxiety in people that they actively avoid the subject. This is so-called budgeting.
Or is it?
The truth is, budgeting has received a largely false and unfair reputation as a strict and scary thing that will make your life miserable and eliminate any financial freedom you may have. That could not be further from the truth! The reality of budgeting is that not only does it give you a better handle on your finances, but it also gives you freedom! That’s right. It doesn’t limit your financial freedom one bit; it provides financial freedom. Budgeting for something will allow you to spend the allocated money on that thing without feeling guilty about it. That’s really the dream, isn’t it? To spend money and not feel guilty. Well, that’s my dream, anyway.
All it takes is some intentionality about where your money goes each month. When you know where your money is ending up at the beginning of each month, you’ll have clarity and peace of mind that you may have never experienced before while doing a budget. Who knows, it may even become fun!
So, without further ado, we’ve compiled the ultimate budgeting guide for you to follow as you begin your journey to real financial freedom.
Let’s dive in.
Table of Contents
- What is a Budget?
- Why Is Budgeting Important?
- What Types of Budgets Are There?
- How To Budget
- Over To You
What is a Budget?
Simply put, a budget is a written plan for your money. You may have grown up believing that a budget was put in place to stop you from spending money, thus limiting your fun. Don’t worry, you’re not alone on that one. We all remember hearing our parents asking the famous question, “do you think money grows on trees?”. Well, unfortunately, it doesn’t, so to avoid reaching the end of the month with no money and not knowing where it all went, you can create a budget. That’s the real reason behind the idea of a budget.
As we mentioned above, a budget helps you to spend your money with more freedom, not less. It empowers you to spend your money confidently, knowing that you’ve made a clear and decisive plan for your finances and where you’re going to use them.
A budget sounds pretty good then, doesn’t it?
Why Is Budgeting Important?
Trying to do a budget without any solid reasoning will inevitably end with you slowly getting tired of writing the thing, and eventually letting it slip by the wayside like a diet or exercise routine.
Notice that each of those things is, in fact, good for us. What’s not good for us, or sustainable, is trying to do any of them without the appropriate motives and inspiration. This is why so many New Year’s Resolutions fade into obscurity, and why budgeting so often becomes a dull and dreary chore.
What you need is a reason. So, what is it?
- Do you want to get married?
- Do you want to buy a house?
- Do you need to provide for your family?
What’s your reason?
Find what your driving force behind managing your money better is, and let it be your motivation to stick to your budget. Then, next time you feel like buying that watch you think will make your life better (you know, the one you didn’t budget for), you can think of your original motive behind your budgeting and remember the purposes of budgeting. Instead of that watch, you can take your partner out to dinner and a movie (which you did budget for!).
If the past two and a half years have shown us anything, it’s that when the unexpected happens, it’s better to be prepared. That’s not just a cheesy motivational line anymore, it’s been a lived reality for many South Africans. The importance of budgeting has never been greater!
What Types of Budgets Are There?
While there are a few different budgeting techniques to consider when you’re thinking about starting the budgeting process, at the end of the day you should only use one. Trying to use different techniques every month will just confuse you and leave you worse off than before you started. Test the different ways to budget, yes, but settle on one definitive way that you can practice consistently going forward.
Here are some of the best ways we’ve found that you can budget:
Zero Based Budgeting
Probably the best way to do both personal and business budgeting, a zero-based budget assumes that the starting point is zero, and everything needed from there should be justified and motivated. This can help curb unnecessary spending in a company, especially during something like the pandemic we’ve just experienced.
If you’re not budgeting for business, not to worry. A zero-based budget just means that when you minus your expenses from your income, the total should be zero. Now, this doesn’t mean that you have no money in your account, it means that you’ve given every Rand a purpose, down to the cent. No leftovers, no floating bucks, no opportunities to squander your cash. Every Rand is made useful.
The most common and widely used type of budget in businesses and governments alike. This type of budgeting takes the previous year’s figures and either adds or subtracts a percentage from those figures to attain the new year’s budget. It’s the easiest and simplest form of budgeting around, which is why it’s so popular. However, unless your cost drivers and variables don’t change from year to year, you’re likely to run into some issues with an incremental budgeting system, the main being possible budgetary slack as there is now no incentive to cut costs when the budget is confirmed for the year.
The Envelope System
A more personal type of monthly budgeting, The Envelope System is a way to help curb unnecessary spending throughout the month by allocating certain amounts of money to specific things you need, and then drawing that money as cash and placing it in the various envelopes dedicated to those things that you need. The whole idea behind this way of money management is that physical cash is perceived by our brains as more real than anything on our banking apps, so in essence cash is king.
This will be revolutionary for some people, and useless to others. As we’ve mentioned above, choose what works best for you.
The general process of budgeting is flipped on its head here, with an emphasis placed on saving and investing before budgeting for things like food, housing, debt etc…
The goal with this kind of budgeting is obviously to build up your savings and investments, which is great if you don’t have any debt. If you do have debt, however, we’d suggest tackling that before focusing too much on saving and investing.
This method of budgeting is based on managing your money in percentages, with 50% going towards your needs like food and housing, and 30% going towards wants (which, if you remember Economics class in high school, are things that you don’t need to survive, they’re just nice to have), and the remaining 20% going towards savings. This may work for you if you’re a percentages kind of person, but the technicality and mathematical nature of it just might put you off if that’s not for you.
60% Solution Budgeting
This is a more broad-stroke version of the 50/30/20 method, with 60% of your income going towards a combined category of needs and wants, and the other 40% going towards more specific forms of savings such as retirement, short and long-term savings, and even ‘fun’.
This type of budgeting can be simpler and more appealing if you’re wanting to focus on those kinds of savings, however, the combination of needs and wants is dangerous because the line may be too blurry for new budgeters. It’s more advisable to get clarity on what your needs are first.
How To Budget
Now that we’ve covered what a budget is, what types of budgeting there are, and why budgeting is important, it’s time to look at the question most of you are probably asking right about now: how do I create a budget? The great thing about budgets is that they’re not hard to create at all! Due to some of the myths we’ve mentioned earlier, they can often be seen as technical and complex and only for smart people who are good at maths. We’re here to tell you that it’s not like that at all. Let’s take a look at how you can create a budget for yourself or your family.
Step 1: Write Down your Total Income
This seems like quite a run-of-the-mill task, but it can be surprisingly informative about where you’re currently at with your money, especially if you don’t usually take stock of your income as a whole. Remember, this is your net income, and it should include any other streams of income you get throughout the month, like freelance work or side hustle profits.
Step 2: List your Expenses
This is the part that can become a little stressful or worrisome for some. It may not be your favourite part of the process, but trust us when we say it’s necessary.
The first thing you need to decide is what you are going to place value on in terms of where your money goes. Do you want to be a saver? A giver? Or everything in between? It’s up to you to choose what your primary focus will be when compiling your budget. If you’re not quite sure of that yet, don’t worry, here’s what we’d suggest (hint: we love the zero-based budget method):
First off, make sure you and your family are provided for by listing the things that you need to live. This can be things like groceries, rent, electricity, petrol, insurance, etc… Once you’ve covered your needs, have a look at any debt you may have and commit an amount each month to paying it off. Then think about the future and what you’re willing to invest in it. Decide on the kind of savings you want to build and include them in your monthly expenses.
The final part of your expense list comprises the classic ‘wants’ category. These are the things you do that bring joy and entertainment to your life and help you live it in a well-balanced way.
Step 3: Subtract your Expenses From your Income
Once you’ve gone through your money coming in and going out, minus what your expenses cost from your total income and make sure that you end up with a big fat zero. Remember, the goal of a zero-based budget is to give all of your money a purpose, so if there’s any leftover, find a purpose for it! If you’ve gone into the negative, have a look at what you can go without. You might not need three coffees a day, maybe two could work?
Step 4: Keep Track and Plan Next Month’s Budget
Now that you’ve created your budget for the month, you’re free to spend the money on the things you care about because you’ve put thought and care into where it’s going! This is the fun part of budgeting, where you can reap the rewards of wise money management. As the month goes by, keep track of your spending and make sure you’re sticking to your written plan. This is where something like an app can help. We recommend one of the best budgeting apps in South Africa, 22seven.
Keeping tabs on how you’re doing with your budget will help you make any tweaks or changes to next month’s budget. You may notice that you’ve overestimated the amount of money you need for something, or you need more money for another thing. These are good insights to carry over to your next budget as you find the perfect rhythm for managing your finances well.
Over To You
And there you have it. Your essential guide to budgeting! We hope that you find this helpful as you journey through the world of money management and budgets. By creating a budget, you’re taking the first (and most important) step to real financial freedom, on your terms. So, well done and keep going!