How to create a monthly budget (and stick to it)
Posted: 16 Nov 2015
3 mins to read
Sticking to a budget
Do you have too much month at the end of your money? Then chances are that you are not managing your finances right. Simply follow these steps to set up a budget that will help you avoid those dreaded “month-ends".
Step 1: Review all your sources of income
Your income is money that you receive on a regular basis (weekly/monthly). This could be your salary, wages, any bonuses, interest earned on your savings account(s), overtime and commission etc.
Step 2: Write down all your expenses
Expenses will include: debt payments, education, food, housing, insurance, medical aid, savings, transportation and utilities (water and electricity) etc. It also includes bank charges and money for entertainment!
Add up all of your expenses and deduct it from your income (the total calculated in step 2). You should be left with a positive amount. If not, you are spending more than you can and will need to investigate where you should cut on spending.
Step 3: Determine which spending habits you need to change
It’s not easy to face the facts and look at where you can cut your spending.To simplify the process, you should try to group your expenses to see where you can cut on luxury spending. Once you’ve cut all luxuries, you might need to consider the non-essential items as well.
Essential Expenses: These are the things you simply cannot live without, like basic food and rent (accommodation).
Non-essential expenses: These are expenses which can be cut (for instance: less essential food items or clothes).
Luxury expenses: These are things you most definitely could survive without and that can be cut from your spending completely (for example DStv or eating out).
Step 4: Restructure your debt
Before you can minimise your debt you need to distinguish between primary and secondary debt.
Primary debt is the most important to pay off first. Not paying your primary debt can result in you losing your home or property, disconnection to services, a fine or even imprisonment. Primary debt will include secured loans – when you sign for these loans, you attach an asset such as your house and car to it, giving the credit provider permission to claim the asset if you are unable to pay back the loan.
You should also consider debt that has resulted in legal action or debt with a high interest rate as Primary debt – these accounts should be paid first and are therefore of “primary concern”.
Secondary debt includes debt that has fewer consequences, should you be unable to pay. This includes micro loans or debt that isn’t attached to any collateral.
Step 5: Allocate extra funds to your debt
After you’ve listed your debt, starting with the most important first, you will be able to see which accounts you need to pay off first.
You should always pay off your debt where you are in arrears or where any legal action has been taken against you, before you even consider allocating extra money to saving.
Once you have identified areas where you can cut on spending, you will be able to free some cash necessary for paying off your primary debt. You should even take it a step further and see if you can free enough money to save every month.
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