How to manage a Personal Budget and deal with unplanned expenses
Whether your objective is to become debt-free, gain financial freedom, or achieve good financial health; a personal budget will help you manage your money more wisely and get you closer to your financial goals. Budgeting is the process of making a commitment to yourself on how you will spend and manage your money by creating spending or budget planner. Creating this spending plan empowers you with insight into your financial health and helps you made financial decisions based on your financial situation and financial goals.
Why is a personal budget so important?
Effective budgeting helps you to create a spending plan for your money and ensures that you consistently have enough money for the things you need and the things that are important to you. Following a personal spending plan will also assist you in working towards getting out of debt faster, with the intention of ultimately improving your financial health and reaching a stage of building up your personal financial wealth.
Tips to consider when creating a personal budget
How you budget, and what you budget for will differ from person to person. For instance, the budgetary needs and financial goals of a student will be different from that of a family or a retiree. Be that as it may, there are five basic steps in creating a personal financial budget that applies to everyone and they are significant in that they build on each other, ultimately helping you organise your personal finances more sensibly and achieving financial fitness far quicker.
Tip 1: Set financial goals
There are two types of financial goals: immediate and long term, both are equally important and complement each other when planning for financial health:
- Immediate financial goals centre around using your money today; such as your bond, car repayment, utility bills, child care, food, cell phone, and household supplies.
- Long-term financial goals refer to savings and spending which spans over decades; such as retirement fixed savings and investments.
It is also important to further categorise these goals into those that are necessities versus those that could be considered luxuries, or nice-to-haves; in other words, what are needs and what are wants?
Tip 2: Calculate your income and expenses
After you know what your financial goals are, you need to put together a financial plan to help you reach them. To do this, you have to assess your salary and your expenses. Most people spend month-to-month in light of the fact that most bills are monthly.
- Start by making a list of your month-to-month income sources. This includes your nett salary (after tax and PAYE deductions); any bonuses that you receive on a regular basis; child support or maintenance payments that you may receive, or any other regular sources of income that you receive from any other means. Add all of these up to get to the total monthly income amount.
- The next step is to list and categorise all of your expenses, which fall into three classes:
- Fixed committed financial expenses: These are fixed monthly amounts, such as your bond or rent.
- Variable committed financial expenses: These vary from one month to month based on needs, such as groceries and petrol.
- Discretionary financial expenses: These are optional expenses and include recreation and entertainment, such as a gym membership.
- Classify these expenses as needs versus wants; as well as whether the expense is part of a short-term or long-term objective.
Tip 3: Analyse your spending patterns
One of the primary reasons we budget is to ensure that your expenses don’t exceed your income. In the event that they do, and more money is going out than what is coming in, at that point you may have to make some serious adjustments. This doesn’t really mean you have to begin penny-pinching; it just means that the time has come to revisit the discretionary cost category and see where you are willing and able to cut the fat.
Tip 4: Revisit your personal budget frequently
Once you have tracked and monitored your income and expenses for a month or two using your budget planner; you should be more aware of the areas where you may need to start making adjustments. Perhaps your initial monthly income estimates were off or there was a change in your income, or maybe you didn’t account for unexpected sudden expenses like car repairs or veterinary bills that required emergency cash.
For instance, should you be so lucky as to get a promotion or salary increase, then perhaps you can start increasing discretionary spending or invest more in your retirement plan or savings goals. Then again, a cutback or fewer work hours could mean reducing spending until you re-establish your salary. Stay sensible, assess it frequently, and don’t be reluctant to change. Make these adjustments, including provision for unexpected emergency expenses in the future, and remember to consistently balance the inflows with the outflows of your money. Budgeting is all about balance.
Remember that your personal budget is not a once-off exercise, and will need to be reviewed regularly and adjusted as you make progress, or where your personal circumstances may have changed.
Tip 5: Plan for unexpected expenses
Unexpected expenses can show up whenever. Regardless of whether your roof starts leaking or your vehicle won’t start, we’re regularly confronted with annoying expenses that we didn’t anticipate. If your budget to set aside an emergency cash fund will to assist you with dealing with unforeseen expenses.
A general rule is to try and ensure that you have the equivalent of three months’ expenditure in your emergency cash fund. That should be sufficient to cover most regular emergencies – however should you not have sufficient cash in your emergency pot, then you may need to dip into your savings account or investment funds to tide you over
Dipping into your savings versus taking out a personal loan or credit
If you have an existing savings account that allows you to withdraw funds immediately without any penalties, perhaps it might be a better idea to dip into this savings account for emergencies, rather than borrowing emergency cash. If you do, remember to budget to top this up again as soon as you possibly can with any surplus cash you have by perhaps sacrificing one of your ‘wants’ for a little longer. Keep in mind, it is smarter to dip into cash savings, than investments. This is because investments are for the most part implied for medium-to-long-term saving.
If you find that you are regularly having to dip into your savings to get through the month so that you can pay off your month-to-month expenses and bills, this is a sign that your expenses are clearly outweighing your income. If this continues for a long period of time, you may start to experience financial stress. Perhaps then it is worth considering which existing debts or loans could be consolidated into a single debt consolidation loan, which could result in you paying lower interest rates and ultimately, lower monthly repayments overall.
In the event that you simply don’t have any means to access cash in an emergency situation for a sudden unexpected expense, then you may need to start looking at applying for a short-term personal loan which allows you to borrow smaller amounts of cash at a fixed interest rate over an agreed repayment period. For instance, a Bayport personal loan allows you to borrow an amount of up to R250,000 with flexible repayment terms from 6 to 84 months at a low-interest rate.
Step 6: Commit to your Personal Budget
Once you have ironed out all the wrinkles in your personal budget, you need to commit to sticking to it. Making a budget is a great first step towards improving your overall financial wellness; however, sticking to it makes all the difference in whether you achieve your financial goals or not.
Remember that saving money today influences what you spend your cash on now, but also gives you a long-term view of what your financial health will look like further down the road.
Contact us should you wish to speak to a Bayport Financial Services consultant about a personal loan, or for advice on credit life insurance on your personal loan.