How does a lack of budgeting affect your financial well-being?

Lack of budgeting increases debt and financial stress, making it harder to achieve goals and maintain financial stability.

Dineo Botsi

Dineo Botsi

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How does a lack of budgeting affect your financial well-being?



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:

  • Difficulty achieving one’s financial goals – You might struggle to reach your financial goals. You are likely to overspend when you do not have a plan and that might lead to not having enough funds to save for your retirement.
  • Overspending – If you do not have a clear understanding of your income and expenses, it is easy to overspend, resulting in having to use credit to fund your expenses which leads to more debt and financial stress.

    More debt
    – If you do not have any savings in place you might need to use your bank overdraft, credit card debt or take out a personal loan to pay for your expenses. This could lead to a debt spiral whereby banks may repossess your car and other assets.
  • Financial Stress – The debt spiral will lead to anxiety and emotional distress because you do not know how you are going to pay the debt and cover your monthly expenses, or any emergencies. This can lead to pressure on your family and friends.
  • Financial Instability – Financial instability can lead to personal and business pressures, which affect you in all facets of your life. Furthermore, this will result in not saving enough for retirement and relying on the State and your family for support.

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

  • It is important to establish clear financial goals, whether you aim to build an emergency fund, pay off a debt or save for a vacation. Having specific goals in mind will guide your budgeting decisions and keep you motivated.


2. Track your income and expenses

  • Start tracking your income and expenses to understand where you spend your money. You can use tools like spreadsheets to monitor your spending habits and identify areas where you need to cut back or reallocate funds.
  • Without a budget there is nothing holding you back from spending beyond your means.

3. Create a realistic financial goal

  • Based on your spending habits and financial goals, you should create a realistic budget that outlines your income, fixed and variable expenses and contributions towards your savings.
  • Prioritise the essential expenses while leaving room for flexible spending.

4. The 50/30/20 Rule

  • Consider following the 50/30/20 rule, where 50% of your income is allocated to needs (e.g. rent/bond/water/electricity/food), 30% of your income of your income is allocated to wants (e.g. entertainment/restaurants/kids’ toys and activities) and 20% is allocated to your financial priorities (e.g. emergency fund/ long term savings/retirement).
  • A certain level of flexibility needs to be applied to the rule bearing in mind that every individual’s financial situation is different, the percentages can vary but it is important to allocate.

5. Revisit, monitor and adjust regularly

  • Budgeting is not a one-time task but an ongoing process. You need to regularly monitor your budget, track your progress towards your goals and make adjustments as and when required.
  • Your budget needs to evolve as life’s circumstances and priorities may change.

6. Accountability

  • Share your budgeting goals with someone who will hold you accountable and celebrate small milestones along the way. This will help you to stay motivated and reinforce positive financial habits.

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.

 


   

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