Financial fitness - Hugue Nkoutchou

Fitness of all kinds is crucial in this day and age. But with a recession on and students well known for not being the most thrifty, financial fitness is increasingly high on the agenda. Hugue Nkoutchou is a SAUJS member at UJ doing his masters in finance and is a certified financial planner. This the first of a series of articles where we will examine this topic.

Planning your monthly budget: what you should know

To budget is to balance one’s income and expenditures. This is usually done on a monthly basis. Budget planning, properly done, can prevent an individual from living beyond his/her means. It is associated with monitoring one’s expenses. The reality is, many individuals are not planning their monthly budget nor keeping track of their expenditures. This fact can partly be attributed to the time and constraints involved in budget planning; individuals’ tendency to mentally keep record of financial activities and lastly the lack of motivation to plan. The latter is a very important factor as the motivation to plan is needed in order to start the process of budgeting. An increased number of individuals are acknowledging the fact that budget planning is vital. The question that arises is why are they not budgeting?

Budget planning usually follows an individual desire to save money for a purpose. Alternatively, an individual may track down expenditures in order to save money for something that really matters to him or her. From the above discussion, it is evident that one should have a goal to create the motivation to plan. But this should be a medium to long-term goal for the motivation to be enough to encourage one to start a budget. For example, a student may plan his or her monthly budget to save money to buy a car in two years time; a salaried person may start a budget plan in order to track down expenditures in order to provide for their children’s education, and so forth.

In practice, budget planning can be done following several steps. Typical budget planning can be summarized as follows:

Step one: Historical data is needed to have a good estimation of what your average monthly expenditures are. Track all expenditures for, at least, the past 3 months. This tracking can be done by keeping all invoices or writing down money spent without having an invoice in return. If one wants to work things out quickly, it will be a very good idea to use an Excel spreadsheet. If this is the case one should first use two columns: item name and current expenditure.

Step two: determine your average monthly expenditure and compare it with your monthly income. Even if the latter is more that the former, this does not mean that one is spending wisely. If the monthly expenditure is more than the monthly income, it means one should do more to reduce their expenditures. A way of doing this is to only spend on things that you need (thing that are adding value to your life) and save on things that you want (things that are not adding any value to your life).
Step three: Add a third column for the maximum expenditure per item for the following month. Some items may be fixed or some may be not applicable to that particular month. For others, set a maximum spending for that particular month depending on your monthly income and your saving goal (this is very important as you may wish to save for example 10 percent of your monthly income for retirement).
Step four: track your future monthly expenditures and make changes where necessary. It is also important to make provision for unforeseen, miscellaneous events.