ASISA: Budget month tips to help you seize the reins on your financial future

28 February 2017 Eugene Jooste, ASISA
Eugene Jooste, Chief Operating Officer of ASISA.

Eugene Jooste, Chief Operating Officer of ASISA.

With February known as budget month in South Africa, the spotlight is once again on the critical importance of a disciplined, yet balanced financial blueprint for our country. But a comprehensive budget is equally important for each individual household to pull the reins in on wasteful spending and begin steering instead towards a brighter financial future.

Eugene Jooste, Chief Operating Officer of the Association for Savings and Investment South Africa (ASISA), says that a practical household budget is a critical financial tool for managing your expenses and finding ways to save towards your goals. These could include furthering your education, buying a home or saving towards your retirement.

“A budget is not a schedule of expenses, but a critical tool in allocating your after-tax money wisely to cover essential living costs, protect yourself and your family against unforeseen risks and to create wealth,” explains Jooste.

He notes that worryingly, many South African households continue to live beyond their means, funding their lifestyles with expensive debt. He points out that according to latest statistics from the South African Reserve Bank (SARB), household debt as a percentage of disposable income was as high as 74% at the end of September 2016. This means that households on average spent nearly three quarters of every Rand earned on debt.

“Our Finance Minister has emphasised that the country can only spend what we can afford, and the same goes for your own budget if you want to survive rising costs and start saving instead. Successful budgeting is about ensuring that you are not spending more than you are earning,” he adds.

Jooste notes that each individual’s needs and circumstances are different and there is no ‘one size fits all’ budgeting solution. He adds that your budgeting process is most likely to succeed if you keep it simple and follow these guidelines:

• Record your income

Jooste says that the first step to create your budget is simply to record your take-home pay, or your income after tax. If your income varies from month to month, you could consider working out what your average monthly salary is based on your past three to six months’ earnings.

He says that the next step is to plot out your monthly expenses, which will fall into four broad categories, namely:

• Contractual expenses

Your contractual expenses are costs such as your mortgage bond or rent that you are obliged to pay to keep a roof over your head. Jooste explains that other contractual costs include your monthly car repayments and utility bills – all expenses that if you had to stop paying would impact greatly on your quality of life and probably your credit rating.

• Protect yourself

Jooste says expenses that protect you from the financial impact of unexpected life events are the premiums for life, disability and critical illness cover, as well as short-term insurance. Your medical aid scheme contributions would fall in the same category.

“While you may not experience any immediate effects if you stop meeting these expenses, failing to prioritise insurance could place you and your loved ones at financial risk,” says Jooste.

“If you were to suffer an accident and were unable to work, your family would not only experience the loss of a breadwinner, but you would potentially still have outstanding debts you would need to repay and additional medical expenses to meet,” he explains.

“Likewise, you need to consider the negative financial impact that losing your belongings through theft or fire would have on your personal balance sheet. Insurance is often a grudge purchase, but it is a necessity to safeguard your future against life’s ups and downs.”

• Pay yourself first

Jooste explains that paying yourself first does mean denying yourself some pleasures now in order to save for meaningful goals such as an emergency fund, a child’s education, a home or a secure retirement.

“Make saving a habit by budgeting for the amount and then automating the deduction towards your savings at the beginning of the month, so that you are not tempted into spending your money on frivolous things,” he suggests.

Remember that you should be investing for the long-term since the power of compounding (where growth on your capital invested achieves more growth) means that smaller investments over longer periods of time may earn more than larger investments over shorter lengths of time. So don’t despair if you only have small amounts to save or invest.

• Discretionary expenses

“Your discretionary expenses are the most flexible items on your budget, and should be divided according to your needs or basic living expenses such as food, cleaning products and fuel, and your wants such as clothing or entertainment,” explains Jooste.

He suggests that if you find you are overspending or are looking for additional ways to save, the lines under your wants are the first place you should look at to tighten your belt.

“It is important to have food on the table, but you do not need to throw a braai for your friends three times a week, drive an expensive car or run up debt on your credit card with the latest designer clothing,” he says.

He notes that once you have created some room in your budget, you can begin allocating more money towards reaching your financial goals.

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