Personal finance is all about finding the best way to make your money work for you. And one of the cornerstones of personal finance is budgeting. And regardless of how much you earn, we all have to budget.
But what is a budget? A budget is telling your money where to go. If you look at your bank statement, it will show how you have prioritised how you spend your money. So a budget is really just a spending plan: how you allocate your money towards your needs and wants. Not one method of budgeting will work for everyone but there are several methods to choose from:
50/30/20 RULE OF BUDGETING
This is one of the most popular forms of budgeting. With the 50/30/20 rule, you allocate your after-tax income in percentages – 50% goes towards necessities, 30% goes towards your wants and 20% towards financial goals such as paying off debt or saving for an emergency fund or retirement. This means that if your after-tax income is R15 000, this is what your budget will look like:
Needs = 50%: R7 500 will go towards rent/bond, transport and insurance.
Wants = 30%: R4 500 goes towards eating out, buying books, saving for holidays.
Needs = 20%: R3 000 goes towards paying off your debt or saving for retirement.
THE 80/20 RULE
The 80/20 rule is a simpler form of the 50/30/20 rule. With this rule, you save 20% of your income and spend the rest. This works if you struggle with budgeting but you are also not in debt. This rule goes hand in hand with the concept of paying yourself first. This means that whenever your salary comes into your account, before you pay anything else, 20% is allocated towards your savings and investments. The rest of the money (80%) that is left, you spend towards necessities and wants in whichever percentage suits you.
Kakeibo – which means “household financial ledger” – is a Japanese budgeting system that helps you track your spending. The Japanese have successfully used this system for more than a century to manage their household budgets.
The core of this method is to help you understand your relationship with money as you record everything coming in and going out! When applying the Kakeibo method, you go back to basics – meaning no apps or excel spreadsheets, just a good old notebook(s) where you record all your income and expenditure.
For this method, you will need two notebooks; one to record your income and expenses once a month, and the other notebook (preferably one that fits into your bag) where you write every expenditure you make during the month.
There is something profound and reflective in writing down your expenses by hand. It brings you close to your spending habits. We often lie to ourselves about just how much we spend on certain things; so this system allows you to come face to face with yourself and your habits.
At the end of the month you reconcile what is in the first notebook to the daily expenditure notebook. Hopefully, this leads to more mindful spending in the long term.
USING TOOL AND APPS
If you are more technologically inclined, there are many tools and apps available to help you manage your money better, most of them easily accessible on your mobile device. There are various tools including:
- Your bank normally has free budgeting tools;
- 22seven (22seven.co.za); and
- Stash (stash.co.za).
The envelope method is particularly helpful if you are trying to tame wild spending. In 2018, I realised I was spending an obscene amount of money eating out. So I started using the envelope method to control my spending and it worked.
With this method, you decide which category you want to tame – that is entertainment or transportation. Then you physically draw the cash and put it in labelled envelopes. This means every time you eat out or go to the movies or take the kids out for ice cream, you only take cash from that envelope until it runs out and, when it does, you know you have exhausted your funds for entertainment for that month.
The envelope method works because there is a psychological effect to holding cash instead of a debit card. Using this method enforces self-discipline because if forces you to track your spending on each chosen category.
This type of budgeting ensures that every rand is accounted for, so that you do not have “idle money”. Idle money is cash sitting in your account with no purpose. You keep telling yourself that you will save or pay extra to your debts using that money but never do. Ultimately, you end up spending it!
If you earn R20 000 for example, your expenditure should be R20 000 as well, making your “balance” zero. However, that doesn’t mean you have zero rands in your bank account at the end of the month – it just means you have zero rands left over in your budget – every rand is accounted for.
If you are like me and you prefer to come up with your own Excel spreadsheet and highlight the different categories, then this method works. I personally like it because it allows me to categorise my expenditure and enables me to plan ahead.
For example, there are fixed expenses you know you need to take care of every month but there are also expenses that are once off in your calendar, while others such as birthday gifts and holidays you can easily add to your spreadsheet and plan accordingly.
There are multiple ways in which you can budget, just find one that suits your lifestyle and financial situation the most.