Households should start off 2010 with a sensible, disciplined monthly budget

“Less that 10 percent of consumers make the effort to draw up a detailed monthly budget for themselves and then monitor their actual spending against this budget” says Paul Slot, Director of Octogen, personal finance wellbeing and debt counselling specialists. “Some have good intentions and do this for a few months, only to then slip back into poor habits. If consumers took the time to design budgets and then track where their money is really going, they could significantly improve their spending patterns.”

Slot highly recommends using the well proven ’35-25-35’ budget principle in order to ensure effective and wise spending of monthly income.

A household budget usually comprises three main categories, being household expenditure, financial services and debt repayments:

* Household Expenditure: 35% of monthly income should go to this category which includes spending on domestic wages, food, communications, entertainment, security, travelling costs, water and electricity.

* Financial Services: 25% of monthly income should go to long term life assurance products, short-term insurance, medical aid, pension contributions and towards longer term savings if possible.

* Debt Repayments: 35% of monthly income should go to repayment of debt such as credit card, home mortgage (or rental, if the residence is not owned), car repayments, instalment sale agreements such as furniture, in-store accounts and any other monthly debt repayments.

There should also be a 5% allocation to an emergency fund saving (as opposed to traditional savings which fall into the financial services category of income spend).

Slot says this approach would mean a healthy and balanced budget for the average person and each month actual spend should be compared against these benchmarks. “In some cases it would be acceptable to exceed the norm in one or more of these categories – but this must then be matched by an equal reduction in one or more of the other categories – as that is the whole point of a balanced budget.

“Older generations called this ‘the envelope system’. At the beginning of the month, bread money would be placed in one envelope, and so on for all types of expenses - and if one envelope was empty before month end, money would then have to be taken from a different envelope.”

The budget must include spending on financial services as products such as insurance and medical aid are a form of risk management, protecting the family against the occurrence of certain negative events. There should also be adequate saving for retirement, which includes the employer pension fund and one’s own additional savings.

Slot says that households have some room to increase debt repayments from the recommended 35% - but this should only be done when the extra repayment is going to a home loan, and definitely not towards vehicles or credit cards. Even then, the monthly debt repayments should not exceed 40% of monthly income.

“Monthly debt repayments that are between 40-50% of monthly income put the household in a dangerous position” cautions Slot. “Should there be any financial emergency, these debt commitments will not be met and all sorts of problems may then arise. Any household in this elevated zone should start working on reducing the debt that is giving rise to such high monthly repayments. Do not take out new loans, not even debt consolidation loans, and cut up credit cards, close accounts, and reduce credit limits.”

Slot recommends that if monthly debt repayments on average exceed 50% of monthly income, this is excessive, even irresponsible, and there will inevitably be cash flow problems. “Someone in this position needs to actively work on reducing debt as quickly as possible. Should cash flow problems arise and debt cannot be serviced, the consumer should then consider consulting with a National Credit Regulator-registered debt counsellor for professional assistance.”

Coming up to the end of the year, Slot says consumers need to take stock of their financial matters and draw up a personal financial ‘To Do’ list. “This means revisiting medical plans as they come up for annual renewal, consider staying home this holiday season instead of going away, and reassess short term insurance cover values such as the car, to see if premiums can be reduced. Use any bonuses/thirteenth cheques for early payment of accounts or for next year’s educational fees, overpay some monthly debt repayments, and even prepay anticipated credit card spending. Do not start off 2010 without a sensible and detailed monthly budget - and then stick to it, even improve on it, during the year.”