February is National Budget month for South Africa. Two weeks from now Finance Minister Pravin Gordhan will disclose the state of the country’s financial situation. Realistically we can expect him to impose some belt-tightening measures for the country and its citizens and possibly an increase in the so-called sin taxes levied on alcohol and cigarettes.
Rather than feeling depressed about the likelihood of having even less cash at your disposal from 1 March, see this as a call to action to draw up your own budget.
Since the beginning of the year consumers had to embrace a 0,5% increase in interest rates and yet another steep increase in the fuel price. According to economists, a tough year lies ahead with further interest rate hikes and price increases on the cards.
While consumers may feel powerless and even despondent when faced with relentless increases in living expenses, every consumer has a powerful tool at their disposal in the form of a household budget.
Just as Finance Minister Pravin Gordhan and his team use the National Budget to maintain the financial stability of the country, you can use a budget to ensure financial survival for you and your family. All you need is some time, honesty and a huge dose of self discipline.
A personal budget will help you take honest stock of your financial situation, identify spending patterns and determine a plan to help you spend less, settle debts and save more.
Without a budget you are likely to reach the end of the month wondering why all your money is gone and yet you have so little to show for it. With a solid budget in place you will know exactly where all your money has gone. You may even be able to free up some money to repay debts faster or to save and invest.
Budgeting is not about highlighting what you cannot afford, but rather about identifying spending priorities.
Only once you have listed your earnings and your expenses, will you have a clear picture of your financial situation. You may discover, for example, that you are paying subscriptions for services that the family no longer needs or values. You may also be shocked by how much you pay for entertainment, alcohol, cigarettes and take away meals every month.
If you are able to save R500 every month and you increase your bond repayment by that amount you may be able to cover the recent interest rate hike with money you did not have at your disposal anyway.
If, for example, you are servicing a mortgage bond of R1 million over 20 years, your monthly repayment at an interest rate of prime plus 2% would have been R10 000 until the interest rate increased by 0,5% at the beginning of February. After the increase your repayment would have increased by R300 to R10 300. This means that a R500 saving as a result of your budgeting exercise would not only cover the increase, but also help you save interest over the long term.
Since there is a very real probability of further interest rate increases this year, consumers servicing debt would be wise to whittle down all debt as quickly as possible.
Short-term debt like credit card and retail card debt is very expensive. What many consumers don’t know is that if you buy on credit the effective interest rate you will be paying is likely to be more than double the quoted interested rate when factoring in fees and other costs.
If you are in the fortunate position of being debt free, use your budget to identify areas of wasteful spending. Use this money to save towards an emergency fund and invest for a long-term goal such as your retirement. If you can save some money every month you are benefiting from the recent interest rate increase.
Successful investors invest first and spend what is left of their income, while those who spend first rarely get to invest the amount required to meet their long-term goals.
The following three tips will make the budgeting process easier:
- Allow yourself some flexibility within your budget. If your budget is too rigid you may become disillusioned.
- Getting the buy-in from your family will make it easier to achieve your budgeting goals.
- Unless you are drowning in debt, spend some money on yourself and your family. But make sure to include this in your budget.
