Creating a personal budget is one of the most crucial parts of personal financial planning and will contribute significantly towards achieving your financial goals.
If it’s one thing we know to be true, it’s that without a solid plan in place, you may find yourself moving through a maze, with no end in sight. This is true for everything in life, including your personal finances.
A personal budget forms part of your road map towards financial freedom. It helps you stay on the straight and narrow path which leads you towards your short-term goals, and ultimately a comfortable retirement which is an important long-term goal that we all work towards.
However, knowing exactly how to make a monthly budget is key to ensuring that your efforts are successful. There is a general formula which can be applied when making a personal budget. In this article, we take a detailed look at this formula.
But first, let’s define what a personal budget is.
A personal budget is a finance plan that helps you allocate future income towards expenses, debt repayments, savings, and entertainment.
It helps you look at money coming in versus money going out and, in doing so, you can make your money stretch even further.
Future financial success depends largely on a budget as it gives you a clear indication of your spending habits and where you could improve them. It helps you work towards a bigger financial goal.
Our financial advisors in Johannesburg have put together a step-by-step guide to making a personal budget. Although there are many ways to go about creating a budget, we have found that this is the most effective method.
Whether you have permanent job with a set salary, or you are a freelancer with more than one stream of fluctuating income, calculating your monthly income is the first step to creating a monthly budget.
Remember that you want to focus on calculating your net income, which is what you take home, after deductions.
If you have irregular income, or more than one source of income and are unsure of how to calculate your net income, our financial advisors are happy to give you advice on how to do this.
Your fixed expenses are those that stay the same from month to month. Fixed expenses usually include things like:
Once you know what all your fixed expenses are, you will need to write down exactly how much each expense costs you per month. You can do this by requesting a detailed bank statement from your banking app or online banking profile.
Then, calculate what all of your fixed expenses cost you in total each month. Do this by adding them all together for a grand total.
The last element to this step is to subtract your total fixed expenses from your net income. The final number is what you have left to spend on variable expenses.
Variable expenses are monthly expenses that fluctuate. In other words, expenses that change from month to month, which include things like:
To calculate your variable expenses, check your bank statement and any other app which can be used for payments like PayPal and SnapScan to make sure you have a comprehensive list of all your variable expenses.
Now, add all of these numbers up to get a total of your variable expenses from last month. Although this number will change each month, starting with the previous month’s expenses will give you a good baseline to work from.
This total should not exceed the amount you have left after subtracting your fixed expenses from your net income. If it does (if your fixed and variable expenses add up to more than your net income) then you are living above your means and you will need to make some serious changes.
Now that you know what your fixed and variable expenses are and what they cost you each month, it’s time to categorize them.
Use specific categories such as “groceries” and “eating out” and include each of their totals next to them. Then, cover these with a broader category such as “food” with the total amount you spend of food next to it.
By breaking things down into categories and subcategories, you will get a clear picture of your specific spending habits.
Add up your total spending per category and convert each one into a percentage. To do this, divide your total spending per category (not subcategory) by your net income and multiply by 100%.
Breaking your spending down into percentages helps you see where you are spending most of your money.
Now that you have all your expenses worked out and laid out in front of you, it’s a good time to check in with your short-, medium-, and long-term financial goals.
Compare your goals with your spending habits to see if you are spending in a way that provides for your goals.
If you are living above your means (spending more than you earn) then rethink your variable expenses.
Fixed expenses are much harder to change immediately but you may realise that you are spending far too much on rent and perhaps it’s time to find a place that is more affordable so you can save more instead.
If you are buying a takeaway coffee every morning on the way to work, consider cutting back to only once a week, or better yet, make your own coffee at home and put it into a reusable takeaway cup.
Many small changes and a few big ones can drastically influence your chances of achieving your biggest financial goals.
Now, set yourself a goal to spend less next month and save that money instead. Start small and ease your way into cutting back more and more on unnecessary spending as each month passes.
Soon you will see that you don’t need all that extra stuff as you work towards a bigger, more rewarding goal.
We know that taking charge of your finances may seem like a daunting task and more often than not, people shy away from the challenge because it comes across as all too overwhelming.
Therefore, we have made it our mission to help you achieve your biggest and wildest financial goals by providing professional, well-informed financial planning services in South Africa.
Regardless of the size of your financial portfolio, we can help you make better choices when it comes to spending, saving, and investing your money. For more information, please contact us.
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