A tool that provides for savings
It is all good and well to be able to keep track of your monthly expenses and direct and redirect them to your priorities, but perhaps the most important role a budget can play in your life is to be a tool for generating savings.
Savings are very important because this is the pool from which you should draw in times of emergency or an unexpected expense without incurring debt. They will also enable you to live better in your retirement days.
And invested well, savings work for you - you earn interest simply for doing nothing with your savings but leaving them invested and this grows your wealth.
In his classic book on personal wealth management, The Richest Man in Babylon, George Samuel Clason says rule number one of personal financial management is "a part of all you earn is yours to keep".
Clason advocates that you save at least 10% of your income. So respected has been this collection of parables that it has been adopted by banks, insurance firms and those coaching people to financial success.
Popular life coach and self-help author Anthony Robbins makes a strong case for every modern person to put aside at least 10% of their income towards savings.
Robbins is a strong advocate for putting this saved 10% of one's income in interest-bearing investments, be they fixed deposits, bonds etc. Over time, the compound interest earned will surpass your expectations.
"Unfortunately, it is quite sad that most of our people do not save," laments Frank Magwegwe, financial adviser and managing director of Thrive Financial Wellness.
He says most try to spend first then save later, but says this ought to be the other way round. You ought to put aside your savings first, before all other expenditures.
In other words, if your salary is R10000, you should immediately put away at least 10% as your savings, then budget on the remaining R9000.
If you can allocate more, that's even better. Magwegwe says from those savings you should aim to keep the equivalent of between three and six month's income for emergency.
He recommends what he calls a 50 - 30 - 20 model for managing your finances, i.e. 50% for your needs, 30% for your wants and 20% for your savings. If you are saving 20%, you can then retain 10% for retirement, 5% for emergencies and 5% for specific goals such as your child's university fees.
Would you like to comment on this article or view other readers' comments? Register (it’s quick and free) or sign in now.
Please read our Comment Policy before commenting.