OPINION: The 6 B's of managing your budget
I get it. Budgeting can be overwhelming. With having to track all your expenses and figure out which categories to prioritise, it can be difficult to know where to start. Which is why I’ve put together the ultimate guide to budgeting. In it, you’ll learn about 6 simple strategies that take almost all aspects of budgeting into account.
This not only breaks it down into smaller, more manageable chunks, but it also provides a template for you to use in the future, each time you’re updating your budget.
Budgeting can be broadly broken down into 6 B‘s: Baseline, Bookkeeping, Bad Bills, Boosting, Belongings, and Bounty. Below I’ll go into each one in a bit more detail.
Probably one of the most important budgeting questions you can ask is: where are you right now?
Every time that you start a diet or fitness program, the first thing you set out to do is figure out where you stand today. You get on that scale and measure your weight. Or you take out the tape measure and provide yourself some useful metrics of your body size. Alternatively, you set a baseline weight for the dumbbells you’re using or barbells you’re lifting.
Why do we do this? So that we can track and measure our progress over time. But not only that – we also do this to help us decide whether we are making the right decisions or whether we need to make some tweaks in our strategy.
Your budgeting baseline is your measuring stick. It’s your starting line.
So, how do we do it? It’s quite simple, really. In order to get a global picture of where you stand financially, you need to set baselines for all of the following: your income, your liabilities (or debt), your monthly expenses and your savings/investments.
What questions do you need to ask?
Income: what is my combined take-home pay each month? This should include your salary as well as any side-income from hobbies, property rentals as well as any disposable interest earned on your savings.
Liabilities: what is the combined value of my debt and what is the interest rate and terms for each debt instrument? This should include student debt, personal loans, credit/store cards and home loans. It’s useful to have the terms and interest rates with each, which can help you develop a debt payment strategy.
Monthly expenses: what is the average amount of money I spend each month? When you’re first starting out with a budget, this can be difficult to predict at first. But as you budget month-to-month, you’ll get a more accurate picture of what your monthly expenses are. Thses should include both fixed (such as rent/mortgage) and variable expenses (such as groceries, fuel and entertainment).
Savings/investment strategy: what is the current state of my savings/investments and what savings rate am I aiming to achieve? Think specifically with regards to your savings rate in terms of your gross salary per month. Are you aiming for 20%? Maybe 40%? Are you trying to be frugal enough to reach 60%? These are important metrics to decide on to help develop your budgeting strategy.
The next question you need to ask yourself is: where is my money currently going?
We all know that the foundation of budgeting is recording and tracking your spending. How you do that is a matter of personal preference.
If you treat your life like a business, you know that regular bookkeeping and balancing of your budget is a necessary part of the process. In a world that has become more digitized, your options are endless. There are countless mobile apps and online budgeting platforms that allow you to diligently track your spending. The drawback with many of these is that they often cost a monthly subscription to use.
This is why I prefer either manual or spreadsheet budgeting. Not only is it free, but it allows you to structure it in a way that is intuitive and user-friendly for you. If you’re looking for a spreadsheet budgeting method, take a look at our FREE Financial Starter Pack, which comes along with a spreadsheet that has been set up for you.
Regardless of which platform you use, this is when you set aside some time to enter in all transactions from your previous spending period. This can be done using either your bank statements, collected receipts or a mobile app that captures your transactions.
It’s important, when completing your budget, to designate specific categories to help you assess where you’re spending the majority of your monthly income. This will show you if you’re overspending in certain areas and give you the heads up to make some tweaks.
Try to be as detailed as possible. The more you measure, the more you’ll be able to manage.
Budgeting Bad Bills
The next important question to ask yourself is: how much is my debt costing me?
It’s easy to calculate how much money you owe. But very few people routinely calculate how much that debt costs them per month, per year and over the lifetime of the debt they owe.
Why is this an important metric to consider? Because debt is expensive. And when you’re aware of just how much you’re paying to have it, it can help encourage you to pay it off quicker or stop you from taking on more.
Using a debt calculator on Old Mutual’s website, if you had credit card debt of R20,000 with an interest rate of 22%, it would take you over 10 years to settle this debt if you paid R400 per month – which is a little more than the minimum balance of R367. Shockingly, you’d pay R34,712 in interest over that period. If you simply increased the amount you paid each month by R100 per month, you could almost halve the interest to R18,334.
I think these calculators are a great tool to analyze how much your debt is costing you currently and how tweaking your repayment strategy can save you money in the long run. By simply increasing your monthly payments by R100 (as in the case above), you could save almost half in interest and shave off five years before you’re debt free.
I believe that every time you open your budget, get into the habit of calculating what your debt is costing you and see whether there are creative ways for you to increase your monthly payments.
Budget Any Boosting
Next, ask yourself: how is your income and lifestyle associated?
Every so often, we get a boost in the amount of money we need to budget. Whether this is a tax refund, an annual end-of-year bonus or an inflation-increased salary.
It’s tempting to want to increase our lifestyle spending when we receive a raise. But we neglect to consider that along with our salaries, the price of food and fuel and general living also increases. Don’t get sucked into the trap of lifestyle creep.
The moment you receive any form of salary boost, consider calling an emergency budgeting meeting with yourself. Sounds dramatic, but the sooner you budget this extra money, the less tempted you’ll be to spend it.
This is where budgeting can be fun. You get to decide how best to divvy up this money. If you’re wanting to be debt-free sooner, you could invest it into settling your credit card bills. Or maybe you want to increase your savings rate? Simply put this money into one of your interest-bearing savings instruments. Or maybe you’d prefer to put this money aside for a short-term savings goal, such as a vacation abroad or buying a new car.
By following the strategies outlined in this Ultimate Guide to Budgeting, you’ll have a better idea of where best to put this money.
Next, you need to ask yourself: what is my savings rate and where do I hope for it to be? What belongs to me?
The calculation is simple. For each month, add up everything you put away into savings, including your retirement, investments and savings accounts. Divide that amount by your gross monthly salary (before tax) and multiply by 100. This is your savings rate measured in percentage.
Financial experts suggest an average savings rate of at least 15%, but I believe this to be too low. Ideally, we should be putting away at least 20-30% of our monthly income, if we want to ensure a comfortable retirement. If you’re aiming to be part of the elite Financial Independence-Retire Early (FIRE) group, this could very well skyrocket to 50-60%.
It’s a great idea to keep a monthly record of your savings rate and how this changes over time. By plotting this on a graph, year on year, you’ll have a visual method that shows whether you’re saving enough.
Don’t be discouraged if your savings rate sometimes dips below the average. There will be months that are more expensive or weighed down by financial emergencies. While this can negatively affect how much you’re able to save in that month, know that it’s temporary and try your best to work around them.
Finally, ask yourself this most important question: what is my net worth?
This is another simple, but effective calculation for tracking your finances. What exactly is it? It’s a measure of your net financial worth, after factoring everything you own of value and subtracting any liabilities or debts that you owe. A simple formula for your net worth: All your assets + investments and cash – any debt.
What are some examples of assets and investments? These would include things such as your house, investment properties, cars, pension funds, retirement annuities, discretionary investments (unit trusts, ETFs etc.), cash in your bank account, interest and dividends earned and anything else that carries inherent value. Other, more abstract examples include any jewelry and gold that you may have.
What are your liabilities? You would have calculated this in step #3 above, but it would include any and all debt that you owe. This could include your mortgage, store and credit card debt, personal loans and student debt.
Subtract your liabilities from your assets and… BAM… you have your net worth. Easy. Plot this value over time, along with your savings rate, to get a better picture of your financial health. Take a look at this article on the Take Charge of Your Money blog, which outlines some additional considerations.
The goal is to see a consistent rise in your net worth. If you do, this essentially means you’re acquiring assets of value while also reducing your liabilities. This is the best financial position to be in. If you notice that your net worth starts decreasing, it’s a good indication that your finances may be hitting bumpy waters and need attention.
A final word
Whenever you sit down to budget, remember these 6 strategies. Investigate each one in detail to get an overall picture of your finances.
Figure out your baseline for the week or month ahead. Enter in all your transactions over the previous budgeting period. Calculate how much your debt is costing you and figure out if you can create wiggle room in your budget to pay it off sooner. If you received a boost in your salary, consider budgeting this money appropriately instead of simply spending it. When you’re done, calculate your savings rate and your net worth.
By following this step-by-step process, you’ll create a habit of looking at your budget holistically. You’ll see where you’re going right and where you might need some work.
If you’re looking to get started, feel free to download the free Financial Starter Pack, which comes with a ready-to-use budgeting template created in Excel.
Are there any budgeting strategies that you use that have become effective in managing your money? Are there any missing from this list that you think need to be there? Comment below and let me know!
Dr. Kyle O'Hagan is a UCT scientist and an avid personal finance blogger. With over 20 years worth of experience in the SA schooling system, he has come to appreciate the value of a proper education and feels that personal finance is an area that is often neglected, particularly at a young age.
O'Hagan is one of Personal Finance's New Voices and his finance blog is called the Saving Scientist.