SPAR Inpiration

Budgeting Brilliance

Basics to Budgeting

When wanting to draw up a budget, there are essentially two main categories that you look at: income and expenses. The idea behind a budget is to have a plan every month of what your income is and what your expenses are, and then make sure that expenses are less than income.

Here’s a step by step approach to drawing up a budget:

1. Pull out a piece of paper, and write down your income at the top of the page.
This is what you bring in every month, and what you spend has to come to less than this amount. If it doesn’t, you’re living in debt, and heading for financial trouble down the line.

2. Underneath that, write down your monthly expenses.
Don’t write down any actual numbers yet, just take 10-15 minutes thinking of everything that you would spend money on in a month, and putting them down on the paper.

3. Categorise your expenses.
This is an important step, and will help you decide when faced with decisions on what to spend your money on. Next to each expense written down in step 2, write down which of the following categories the expense falls into:

Basic human needs (what you need to physically survive – shelter, food, water, rest, etc.)
Basic ‘societal’ needs (what you would be paying for if you live in the real world – car/transport, fuel, insurance, retirement contributions, tax, electricity, basic clothes and toiletries, etc.)
Nice-to-haves (what makes life worth living or creates some sense of balance – basic entertainment, eating out, smart clothes, etc.)
Luxuries (always nice, but can easily live without them – expensive gadgets and accessories, holidays, luxury clothes, extra entertainment, expensive cars, etc.)

4. Put down your ideal spending allocations

In a perfect world, this is how your income would be split. This will vary from person to person, but there are basic guidelines which are generally regarded as prudent. For example, spending more than 25-30% of your income on accommodation (rent/mortgage payments) could be seen as excessive. Likewise, spending more than 20-25% of your income on car payments or transport is not smart either, if you can help it. A very rough breakdown of after-tax allocations could look like this as a starting point:

Savings/retirement contributions: 10-20%
Accommodation: 15-25%
Food: 10-15%
Transport: 10-20%
Insurance/utilities: 10-20%
Entertainment: 5-10%
Other nice-to-haves: 5-10%
Luxuries: 5-10%

5. Now write down what you ACTUALLY spend.

This can be a difficult one, as you may not have an exact idea of what you spend month-to-month. To get a firm idea, take down everything you spend on a day-to-day basis, in a small notebook or on your cellphone. And we mean EVERYTHING – from groceries, to fuel for your car, to those drinks you had with your friends, to your morning coffee, to the small change you put in that charity box. Then, after doing this for a month, go through your bank statement and add all of your monthly expenses (such as loan repayments, insurance, pension deductions, etc.) to this list.

6. Compare what you actually spend to your ideal spending allocations.

You’ll probably be unpleasantly surprised! Identify how much of your income is being spent on nice-to-haves and luxuries. If you’re battling to pay your rent, but you’ve gone out with your friends twice a week, you need to change up your priorities. Have a long, hard look at the differences between what you should be allocating your money to and what you actually do.

7. Now write down a budget going forward.

You’ve seen where you spend your money, and where you should spend less. Now write up a budget that’s realistic, and applies your income to your basic needs first, steadily escalating up to nice-to-haves and luxuries if there is any money left over. Take your time, you don’t need to rush it. Ultimately, you want to have a solid idea of what you make every month, what you should be spending, and what’s left over. Then, relax and give yourself a pat on the back, safe in the knowledge that you’ve taken some more control over your finances!

Gareth Cotten (B.Comm Accounting and Honours in Taxation) is the founder of the Good Advice blog www.goodadvice.co.za and an entrepreneur with a strong financial background. His business endeavours include financial coaching and consulting, and he also teaches a number of UCT finance short courses offered through GetSmarter www.getsmarter.co.za.