Budgeting is often overlooked and underestimated by many individuals however, it is a crucial part of financial planning. In this article we look at the pros and cons of not creating and sticking to your budget.
By definition, budgeting is the process of creating a plan to spend your money wisely, based on your income and expenses. It can assist you to save money, avoid overspending and cover necessary expenses. In addition to this, budgeting is an important part of financial planning as it assists you to work out your short and long term goals, as well as plan for unforeseen circumstances.
Creating and sticking to your budget can help you take control of your finances, which can lead to greater prosperity and less stress. For example, a well-structured budget can allow you save for a down payment on a house, schooling for your children, a vacation and retirement.
It is important that you take control of your finances because not having a proper plan in place can affect your emotional and physical wellbeing and potentially negatively affect your relationships with family and friends. Your health, financial and emotional wellbeing should be considered equally important and, in some way, interlinked.
Lack of budgeting can have serious consequences on your financial wellbeing potentially leading to a debt spiral, difficulty in achieving your financial goals, overspending, financial stress and financial instability. These are discussed in more detail below:
In the past 2 years, the South African Reserve Bank has increased the interest rate by 5% which pushed the prime lending up to 11.75%. The prime lending rate is the rate at which corporate and individuals borrow from banks. Due to interest rates being so high, it means that repayments on homes, cars, personal loans and overdrafts take more of your disposable income. This has impacted the financial landscape of individuals and families across the country but means that they have less money to spend on food, clothes, other consumables and luxury items.
Recent stats from the South African Reserve Bank in their Quarterly Bulletin revealed that the total household debt makes up 63.3% of South Africans’ disposable income, which shows that South Africans are feeling the pinch of the increased interest rates.
This is why it is important to have a budget and a pool of savings that you can tap into in a tough economic environment or in unforeseen circumstances like the Covid-19 pandemic.
As illustrated above, the impact of not budgeting can have many implications. By taking the time to create a budget, individuals can pave the way to a more secure financial future and achieve their long-term financial goals. To assist you in taking control of your finances, we will discuss some of the effective budgeting strategies for everyday use:
1. Set clear financial goals
2. Track your income and expenses
3. Create a realistic financial goal
4. The 50/30/20 Rule
5. Revisit, monitor and adjust regularly
6. Accountability
It is never too late to take control of your finances and start budgeting. With the guidance of a financial advisor, you can learn to create a budget tailored to your specific needs and goals. Remember “budgeting is a journey, not a destination”, embrace the process and watch as your financial wellbeing flourishes.