Each year we are presented with our president’s State of the Nation address and the finance minister’s budget speech around the same time. The SONA is closely linked to how money is spent; it’s a powerful reminder for us to consider the close link between our lives and our budgets!
Good finances begin and end with good budgeting – when you have a good budget and stick to it, you’re often 90 percent of the way to wherever you want your money to get you. But what is it about budgets that make it so hard to stick to them?
Failed state 1: The fantasy budget
This may sound familiar: you decide to work out your new budget, so you write down your income, your monthly expenses are guesstimated and some vague savings goals like ‘get out of debt this year’ or ‘save R4000 for retirement every month’ are set.
What’s wrong with this picture?
It’s not specific enough.
Many of us don’t work with an accurate measure of what we are spending day to day. We tell ourselves we spend R250 on our morning cup of coffee at work because that’s an amount we’re subconsciously okay with, when it may be closer to R550 per month. We tell ourselves we’ll ‘get out of debt’ but haven’t tracked exactly how much is owed on the credit card, or how much our interest is costing us.
A budget based on speculation is a fantasy budget.
A better budget: Get real about tracking
There’s a reason why almost every diet out there insists that you start by tracking exactly what you eat – reality is hard, but it works.
To start creating a budget, take a look at your bank statements for the last 3 months at least to determine your real expenses and the exact amount you make monthly. It’s also worth looking at the exact amount of debt outstanding on anything like credit cards or store accounts and, if you have savings goals, the exact amount you’ve saved so far.
Not only will you have a clear picture for the first time, you’ll also be inspired by the dose of reality to keep saving and keep an eye on those expenses.
Failed state 2: The too-tight budget
A super realistic budget shaped by the step above is great, but can sometimes lead to the second most common error in budgeting: a too-tight budget.
This may seem contradictory to you, but it is very important not to account for each and every cent with no flexibility. An okay budget works with exactly what you get and spend in your real life, right now. A good budget realises that life is what happens when you’re making other plans.
If you have no leeway in your budget for emergency expenses, you’re going to struggle to stick to your budget. Emergencies happen, spontaneous purchases happen and sometimes things cost more than even a carefully-planned budget can account for.
A better budget: Set up your own emergency fund
Everyone has sudden expenses, everyone has emergencies. Therefore, everyone can benefit from an emergency fund.
Whatever you can save to guard against these surprises is good, but a general rule of thumb to aim for is three months’ salary tucked away, which will cover you for many unforeseen, unfortunate events. Also, don’t undervalue the importance of insurance for your household items, income and movable assets – not just for your property and car.
Failed state 3: The emotional budget
You’ve set up your budget and are ready to go, but are you looking at your expenses through objective eyes? Many people classify wants as needs, when in fact they could spend less on eating out, cellphone upgrades, new shoes or the work cafeteria.
Another instance of being emotional with budgeting is when we are unrealistic about how much we can save for certain goals. If our savings goals are unrealistic, we’ll struggle to achieve them and lose precious momentum we need to keep at it.
Saving is like brushing your teeth – it’s the everyday habit that makes it effective, not a once-off effort.
A better budget: Cut back what you can
Be accurate about what you spend, then evaluate what you can do to cut that down – you’d be amazed at how small amounts add up.
Can’t see your blind spots? Give your budget to someone you trust. They may be able to see with fresh eyes and say: ‘do you really need a new car every year or a bagel from the canteen every day?’
Failed state 4: The solo budget
No man is an island, and very few budgets are either. If you’re married and/or have kids or are living with someone else, you need to take them into account. Why? Because they may well have their own budget ideas that could clash with yours, or you can be assuming something on their part incorrectly. Just because it’s your spouse who always picks up the dry cleaning doesn’t mean that they’ve got it on their budget. And they may well have decided on an aggressive savings plan you know nothing of. It helps to check.
A better budget: Talk the talk
Sit down together and compare budgets. Also, this could be a great opportunity to plan together for a shared incentive, like a holiday. If you have kids, inviting them into the budget conversation can be invaluable education for them too.