Nine steps to a budget

09 Jan, 2022 - 00:01 0 Views
Nine steps to a budget

The Sunday Mail

To create a budget, you have to start by creating a picture of your financial situation. It helps to have a list of the bills that you must pay each month, as well as your pay stubs, and either bank records or receipts from the past three months.

Step One: Determine your income

Begin by listing your monthly income. This should include any pay cheques you receive, as well as income from other sources.

If you have a business, you should include the amount you pay yourself each month rather than the business’ total income. If you do not get paid monthly, look at how much income you had last year and divide it by 12 to determine your likely monthly income this year.

Step Two: List categories of mandatory expenses

Mandatory expenses are the expenses that you must pay every month and are vital to your housing, work, or legal obligations like rent, electricity, water, internet, food, medical aid, transport etc.

You can usually identify mandatory expenses because they are fixed amounts, although some, such as electricity or water, can vary month to month. If you have debt payments, such as bank loans or credit card payments, they should also be included. Don’t worry about assigning values yet; simply make a list of the categories.

Step Three: List categories of discretionary expenses

Next, identify your discretionary expenses. These are things you can go without, but often choose to spend money on. They are wants, rather than needs, and may include: clothing, DStv, leisure travel, eating out etc.

You can also include savings goals, such as retirement accounts or a down payment fund, as discretionary expenses for now. There will not be immediate consequences if you scale back on these for a little while, although there may be long-term consequences if you ignore them for an extended period of time. Once your budget is under control, you can move these to mandatory expenses with fixed monthly contributions.

Step Four: Estimate expenses

Once you have all your spending categories listed, it’s time to assign monetary values to them. Without looking at your spending patterns, write down what you think you must or will spend in each category in a month.

Step Five: Compare estimated to actual expenses

Now, go back through your spending history for the last three months and determine what you actually spent in each category per month. You can use your receipts or bank statements to determine what you actually spent. Compare these to the numbers you estimated.

Step Six: Assign spending limits within your income

Once you have a sense of how much you are spending per month compared to what you think you spend, it’s time to set spending limits. Start by budgeting for mandatory expenses, then add up these values and subtract them from your income.

The amount you have left is what you can budget for discretionary expenses and savings goals. What you budget for expenses should not be more than your income; otherwise, you will end up in debt.

If you have debt payments, start by budgeting for the minimum payment, then add more if you have available funds leftover. If you have additional money after you plan your budget, you can add it to the categories for financial goals like saving for retirement or building an emergency fund. After that, you can budget more for discretionary expenses and luxuries.

Step Seven: Look for places to cut expenses

If you have more expenses than income, you will need to find ways to cut back on your expenses. Start by lowering the spending limits in the discretionary section of your budget or eliminating them entirely.
Next, look for ways you can reduce your mandatory expenses, such as:

A cheaper monthly insurance premium
Using less electricity at home
Taking the bus to work instead of driving
Spending less on groceries

If your expenses are still more than your income, you may need to increase the amount you earn by negotiating a raise, adding a second job, or taking on gig work.

Step Eight: Track your spending

Once you have your budget set for the month, you will need to track your spending and stop when you have reached the limit in each category. When you stop spending, that’s called sticking to your budget.
If you end up spending more in one category than you had planned, you can transfer money into that category to cover it from another category.

For example, if you budgeted US$400 for food for one month and you ended up spending US$450, then you can move US$50 from another category to cover it. To do this, you will need to check your spending before making purchases to see how much you have left.

Step Nine: Plan for the next month
After you have completed your first month of budgeting, it will be easier to plan for the next month. Look at how you spent your money, make adjustments for categories in which you spent more than you planned, and cut back on the categories that had additional funds in them.

You should also look ahead to large expenses coming up, such as insurance premiums that are only due every few months or upcoming holiday expenses. Plan for these larger expenses as you set your budget for the next month. — The Balance.

Share This: