NICOLETTE’S NICKELS:
A stroll in a mall can lead you down one of two paths; one where you buy a new pair of sneakers impulsively because, sheesh, look, you still have some money left after all your debit orders have gone off.
Or you could go down the path where you quickly remember your friend's upcoming birthday on the last weekend of the month. You need your money to last until then so that you don't rely on your credit card to buy a measly bouquet of flowers. This is what the millennials call adulting! But it shouldn't be this painful. You can still get those sneakers you have been eyeing. You need to become budgeting royalty.
Too many people are left with more month than money. I remember a 2018 IOL article that said, according to data from FNB's retail segment, middle-income consumers were those earning between R7 000 and R60 000 a month. Of those, approximately 56% spent all their monthly income within five days or less of receiving it.
The harsh truth is many of these consumers have a massive chunk of their income going to the “I don't know what happened to my money” category. Generally, consumers are clear on their contractual debt and sometimes have a fair clarity on their living expenses. It's the miscellaneous and impulsive spends that we can barely control, let alone remember.
What could be the problem? Well, one of the primary diagnoses is not having or following a budget tailored to one's financial situation.
Financial independence will become a far-fetched dream if we do not responsibly manage our finances. I have touched on budgeting in the past; however, I have realised that people do not entirely understand budgeting and how to use it for specific purposes. In simple terms, budgeting compares your total income to your total fixed and variable expenses that you can expect for the upcoming month, year, or whatever period the budget is designed for. So let me break down the various budgeting methods and how you can use them practically.
1. Incremental budgeting. For this, you calculate your budget by either adding or subtracting a percentage to see what the next period's budget will be like. This is appropriate to use if the primary "expense drivers" do not change. For example, you could have a household budget, but expect your child to be born in two months. So you may want to add a percentage for the expenses of taking care of an additional human in the house. Remember to take increments such as inflation into account.
2. Activity-based budgeting. For this, you may have a specific goal in mind, and you budget for activities that will help you achieve your goal. For example, you may want to start generating a higher income within the next six months, or you may want to create a small business. Once you know your goals, you can break them down into more minor activities. For example, finding a new job or starting a new business may require you to improve your skills, so you will need to create a budget for paying tuition fees.
3. Value-proposition budgeting. The budget is calculated according to each line item's value. You will need to do a deep dive into all your current expenses and analyse whether or not the value outweighs its cost. For example, you may be paying for DSTV and Netflix, but you rarely watch one of them. So if you are not gaining value for it and money is just leaving your account each month, then perhaps that is an indication to close the subscription. There may be justifiable reasons to keep paying for something you do not use. For example, you may have paid for medical aid for the past five years and never used it, but it is worthwhile in case of any hiccups down the line. For each line item in your budget, ask yourself why it is included, and if the reason does not make sense, cut it out.
4. Zero-based budgeting. For this, you use a bottom-up approach, unlike the other methods. Consider having absolutely no expenses and then build from there. You can then analyse each line item that you put into your budget and determine if you are using the best option. Are you using the best mode of transportation; are you buying groceries in a savvy way; are you saving enough? Ask yourself if something is essential. Until you can justify why, assume it should not be included.
5. 50/30/20 budgeting. Allocate 50% of your budget towards essentials, such as paying for transport, accommodation and food. Then 30% goes towards your wants, such as entertainment, and the remaining 20% goes towards savings. This is probably one of the most popular ways to budget, but it can also be the hardest at times. because everyone's finances are different. But you can still strive to achieve it.
Whether you use a top-down or bottom-up approach to budgeting, always consider the purpose of the line items you have set in your budget – do you have any reasonable justification for their inclusion?
I know everyone is more than capable of making a budget plan for their lives, so take what you have learned here and make finances the last thing you stress about at night.
Nicolette Mashile is the co-host of the SABC1 talk show Daily Thetha, an actress on Generations and the founder of Financial Bunny, a financial literacy platform. She has now written a book, What’s Your Move? A Collection of Ordinary Financial Lessons.
PERSONAL FINANCE