Guide to effective budgeting in 2020 – 7 steps

Effective budgeting ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget will also keep you out of debt and moving toward your financial goals.

Step 1: Track Your Spending

Analyzing bank statements and creating forecasts might seem like a daunting task at first. This is why most people do not have a budget. They don’t know how and where to begin.

The good news is that technology is here to help! Free budgeting apps, like 22Seven (developed by Old Mutual), make it easy to keep track of your money and provides a personalised budget automatically.

Tracking your spending on a regular basis can give you an accurate picture of where your money is going and where you’d like it to go instead.

Step 2: Budget for emergencies

Sometimes the best things in life are unexpected. However, sometimes unexpected events can lead to unplanned expenses. Take precaution by building an emergency fund.

An emergency fund should contain enough money to cover between three and six months’ worth of expenses. This fund must be accessible. Examples of investment vehicle include Savings Accounts, 32-day fixed deposits and Unit Trust Investments (seek advice regarding fund selection).

Step 3: Pay Off Your Debt

Debt can feel overwhelming, especially when you have debt on multiple credit cards. The first step is to create a debt payoff plan.

If you only have one debt, your strategy is simple: make the biggest monthly debt payment you can handle. Rinse and repeat, until it’s all gone. But if you’re like most people in debt, you have multiple accounts to manage. Then it is best to use the “Avalanche Method” to eliminate debt.

With this debt elimination strategy, also known as debt stacking, you’ll pay off your accounts in order from the highest interest rate to the lowest.

Step 4: Save First. Spend What You Have Left.

Saving money should be something that you do monthly and you need to be disciplined with it. Automating your savings is the best way to create discipline. Do this by starting an Investment with a monthly debit order.

There are different investment vehicles available, each with their own tax implications, risks and liquidity. Your best bet is to consult with an Independent Financial Adviser who will guide you to a suitable solution.

Step 5: Create a buffer in your budget

Put a small amount of money aside for unexpected expenses. These expenses refer to small and infrequent transactions, rather than emergencies. Label this as your miscellaneous category in your budget. That way when something comes up, you can cover it without taking away money you’ve already put somewhere else.  

Keep track of expenses that frequently end up in this category. Eventually, you might even want to promote them to a permanent spot on the budget roster.

Step 6: Strive to follow the 50-30-20 budgeting rule


American Senator and bankruptcy expert, Elizabeth Warren, popularized the ’50/20/30 budget rule’ in her book, All Your Worth: The Ultimate Lifetime Money Plan.

How it works:

  1. Calculate Your After-Tax Income
  2. Limit Your Needs to 50% of Your After-Tax Income
  3. Limit Your “Wants” to 30%
  4. Spend 20% on Investments/Savings

People have different goals and priorities when it comes to budgeting. However, the 50-30-20 rule is a good start point for your journey to financial wellness and eventually… financial independence.

Step 7: Maintain 2 budgets

Actual Budget

Use steps 1-5 above to create an accurate budget. Knowing how you spend your money and understanding your cash flow will impact your spending behaviour.

Goal Budget

Use step 6 as a “rule of thumb” to create your ideal budget. Alternatively, consult one of our Independent Financial Advisers. We specialise in creating practical financial plans for your financial goals.

Together we can create guidelines for your spending and income targets.

Budgeting Exercise With A Professional

Learn how to create an effective budget from one of our Independent Financial Advisers. Feel free to reach out and start your journey to financial wellness.

Phone : +27 21 914 7480
Cell: +27 82 893 2795

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