Budget sets tone to financial freedom
It's often said that having no personal or household budget could lead to failure in reaching your financial goals. The advantages of budgeting outdo the time and effort put into it.
A budget helps eliminate unnecessary expenses and hidden fees; getting your savings organised can really make the extra money work for you.
Suze Orman, the famous personal financial planning author, mentions in one of her books that if you are respectful of your money and do what needs to be done with it, you will become like a magnet, attracting more and more money to yourself.
If you treat your money with disrespect you are actually denying yourself the respect that you deserve. And when you don't respect yourself and your money, you repel wealth and block away more money.
A personal budget is a great tool to assist in taking control of your money. Knowing what is going out is only one part of getting honest with yourself.
You also have to know if you have money coming in to pay what is going out. The budget helps you to match exactly what is coming in (after taxes) with what you have going out.
In my regular columns, I often recommend a simple formula that can be adopted for a particular topic of interest. Today I would like to recommend the 50-30-20 rule.
This formula was made popular by Elizabeth Ann Warren, an American politician and former academic and law school professor specialising in bankruptcy law.
The 50-30-20 principle is useful when allocating money to savings and investments. This means that 50% of income should go to living expenses, which would include essentials such as insurance, rent, education fees, transport fees and so on.
Thirty-percent of income should be for flexible spending, such as pay-TV, gym fees and entertainment. Lastly, allocate 20% of your income to savings and investments.
This budget principle can be helpful. It can give you a framework for examining your spending, so that you can see where you need to make changes. As you look at your spending through this particular lens, keep in mind that this budget framework, like any other, is a starting point.
It's just a rule of thumb, but it's not one-size-fits-all. The goal here isn't to twist your spending until it exactly matches these categories. It is to look at your spending through this lens to see where you might make some tweaks.
The huge step to maintain a personal budget is to start compiling one.
The following steps can help you create a budget:
Step 1: Identify the amount of money you have coming in.
Step 2: Track your spending.
Step 3: Set your goals.
Step 4: Make a plan.
Step 5: Adjust your habits if necessary.
Step 6: Keep checking in and monitoring
Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you.
Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.
Having reduced debt to acceptable levels will hopefully result in extra cash that can be used to start a savings plan.
This is the simple 1-2-3 money principle that the Financial Planning Institute regularly advocates.
- Sekese is a certified financial planner professional and member of the Financial Planning Institute. Visit www.fpi.co.za