January: the only month of the year with over 100 days. Janu-worry may be nearly over, but the stress of over-spending is going to sit with you for a while still as you pay off your credit card, and other short-term debt. While you live through the next few months of personal austerity, you should also be thinking about a better regime of proper financial planning, responsible spending and fiscal discipline.
You’ve heard it time and again: you must have a budget, which is absolutely correct, but it’s also essential to have a personal cash flow statement too. Although these may seem like unrelated concepts, they both play a very important part in showing what you think you do with your money and what you do with it.
So what’s the difference?
The difference between a budget and a cash flow statement is that a budget is an estimate of future expected income and expected expenditure. A cash flow statement gives an honest account of actual income received and expenses incurred; a monthly bank statement is a good example of a cash flow statement because it reflects the flow of money on a monthly basis.
Top tips for building a budget
A budget is a good way to implement discipline and responsible spending. This is done by managing expenses in relation to your income. A budget is done in advance and can therefore be used as a planning tool. An example of this is that if you are getting paid earlier in the month of December, make sure you are allocating enough funds for your expected expenses which will be due later in the month.
If you are fortunate enough to be receiving a bonus, put aside additional funds to account for increased medical aid rates, insurance/investment policy anniversaries that have premium escalations and the higher cost of school supplies and fees.
Once a budget has been drawn up, it must be implemented otherwise it's not worth the paper it's written on. Some factors that can influence the successful drafting and implementation of a budget are:
Involve the people that the budget will affect. If you're planning a family vacation, plan with the family for things like where you will be staying, food you will be eating, activities etc. This will result in controlled and responsible spending habits.
Be honest with yourself and those involved. If you have a joint budget with your spouse and you must contribute towards an extended family event, let your spouse know.
- Be realistic
The budget needs to be realistic. Don't be too aggressive or conservative with your estimation e.g. budgeting R500 for petrol a month when you travel 50 kilometres a day to work is not a fair assumption on how much you’re going to spend.
- Track your spending
You must keep a documented record of your planned budget versus your actual spending in order to compare and track how realistic your budget is and amend it - or your spending - where necessary. For example: if you budget R1,000 per month for petrol, and you're spending R2,000 you must adjust the budget accordingly for the following month. And of course, remember to tell those involved in the budget what’s changed and why.
- Time vs money
There are the monthly expenses that your budget needs to cover, but there are also plans in the future that need to be thought about and budgeted for. Janu-worry comes about because we don’t put money aside for the excesses of the festive season - parties, gift buying, the family holiday, and even black-tax. So, if you’re planning a holiday for December that will cost R24,000, you should be putting away a minimum of R2,000 every month from January. These funds should be put away into a short-term investment vehicle so that you don’t use the money for something else, but also so that it grows a bit. Think of it as a reward for your good financial management.
- Prepare for the unforeseen
Your budget needs to provide for flexibility as there could be an unforeseen expense coming your way – cars break down, kids need braces and geysers do burst. So if possible, it’s worth putting some additional money aside for this kind of eventuality. If you don’t, you may very well have to take from your holiday fund, which isn’t what it’s there for.
Plan, track, repeat
Your budget should be reviewed at least once a year, but twice is better. Tracking your budget and cash flow statement and discussing it with all the necessary members included in the budget, will not only assist you to mitigate the Janu-worry woes, it will put in place clear guidelines of what is required in order to meet your goals.
By putting these guidelines in place and implementing them, you can say goodbye to Janu-worry, Febru-worry and March on forward with financial peace of mind.
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