What is in a budget?

One often underestimates the impact of one’s decisions today on the ability to create future wealth. Even the seemingly insignificant decisions, like taking the time to review and optimise your budget every year, can bring the financial change you’ve been hoping for.

When reviewing a budget there are some common expenses that are generally overlooked but definitely worth revisiting.

For instance, consumers will be disillusioned by the steep bank charges they pay monthly. The majority are, however, unaware and continue to view it as a seemingly insignificant expense. The same can be said for cell phone, internet or other fixed expenditure. Optimise these expenses by shopping around to make sure you’ve got the ideal solution for your needs. The effort is definitely worth the money you’ll save every year.

By minimising high interest debt like store and credit card debt you’ll cut your expenses even more. Did you know that these loans can sometimes charge interest of up to 20% per annum? This is extreme given that cash in a money market fund earns interest of less than 6% per annum at the current interest rate level. It therefore makes sense to eliminate high interest debt as soon as possible by paying more than the minimum required amount. Hopefully in future you’ll think twice before you buy things you cannot afford to pay for with cash.

Another expense to consider is short term insurance, of which the largest expenditure is normally allocated towards vehicle insurance. By adjusting your car insurance to its new lower book value every year you will be able to cut your expenses even further.

These are but a few pointers to get you started. Once the time and effort has been spent to optimise your budget you should dedicate the savings on expenses to an investment. With little effort you’ll probably be able to cut your expenses by R500 per month. Now decide how you want this money to work for you.

Can it make provision for your children’s education? The overseas holiday you’ve always dreamed of? Will it enhance the deposit on your first home?

Investing a mere R500 per month can have an extremely rewarding outcome. The table below illustrates this and the effect of compounding over time. The longer the investment term the more superior the growth. Investors unfortunately often underestimate this powerful force, whilst in investment circles globally, compounding is often referred to as the eighth wonder of the world. Therefore, the sooner you start saving, the better the effect of compounding and the greater the investment outcome.

Source: Glacier Research

What is also evident is the enhanced return if an investor is willing to accept greater risk. If you were going to spend this money anyway, should the choice of risk not be indifferent to you? Given the probability of an enhanced return and the fact that equity risk reduces over time - as can be seen in the graph below - an investment largely in equities should surely be the obvious choice?

Source: Glacier Research

So what is in a budget? I think you will agree when I say it can be a start to the financial change you’ve been hoping for. So don’t delay, start with what you hope for today.