In Greek mythology, we are told about the infamous siren. The siren is a creature with the head of a woman and the body of a bird. According to mythology, they lived on an island where they lured passing sailors towards them with their enchanting and irresistible singing voices, causing ships to wreck on the rocky coast. Sailors who couldn’t resist the temptation of the siren song, had to watch helplessly as their ships and crew perished at the hands of these creatures.
You can apply the same principle to personal finance. We all know that debt is bad and that we should remain within our spending capabilities, but easy loan availability is a temptation few can resist, much like the sirens’ song.
A mistake made by so many, is to believe that a personal budget can be memorised, that paper is a mere formality. Unfortunately, you have lost half the battle if this is your strategy.
Following the recent budget speech, I don’t think that people quite grasp the enormity of the increase in VAT from 14% to 15% as from 1 April 2018. Most of us only consider the effect of this increase on groceries and fail to realise that it will also affect other monthly expenses such as insurance premiums, cell phone and telephone accounts, utility bills and even bank charges, to name a few. If we really have to, we can still cut back on a few luxuries when grocery shopping to save costs, but the effect this increase will have on fixed, compulsory monthly expenses, will not be as easy to control. For this reason, it is absolutely crucial for South Africans to revisit their personal budgets (or get cracking if you don’t have one) to make sure that they don’t end up shipwrecked because of the increase in VAT.
A personal budget is easy to set up and it shouldn’t take you more than 15 minutes per week to update. Below, I placed my 15-point budget plan:
1. Start with a clean Excel sheet or a piece of paper on which you can draw columns.
2. Categorise your expenses by working through a bank transactional statement or your bills for the past week.
3. Don’t forget to include your hobbies, habits and/or any other extras you treat yourself to every now and then.
4. All funds flowing into your account should be identified clearly in order to determine your average monthly income.
5. Remember that saving comes first. Saving should not be an afterthought, so make sure that you set aside a fixed amount in a separate savings facility every month.
6. Set yourself realistic goals with which you will be able to cut back on the expenses listed in each of your columns in an attempt to save, or save more if you’re already on the right track
7. When you’re happy that you have included all the possible expense categories that apply to you, you can start to add up these expenses in each column. This is exactly where you will need to take the VAT increase into account when planning ahead for future budgets.
8. Be sure to include all cash withdrawals in your budget on a weekly basis as well.
9. Next, it’s time to calculate the subtotals of your income and expenses.
10. Subtract your expenses from your income in order to determine your net income.
11. If you have a negative net income (i.e. your expenses exceed your income), you will have to seriously re-evaluate your expenses and spending habits.
12. If you are lucky enough to have some funds to spare, transfer as much as possible of this amount to your savings account, unit trust or other savings facility identified in point 5. Leaving it in your bank account will tempt you to spend it on things you don’t need at some point.
13. Take stock of your expenses intensively for at least a month or two in order to identify and quantify your monthly expenses with the purpose of again trying to determine where you can cut back on them.
14. Again, set yourself realistic goals to reduce the abovementioned expenses, by starting with your biggest expenses first.
15. Be sure to keep your budget up to date, and to evaluate it on a monthly basis.
The story of the siren song continues:
Orpheus, a talented and charming musician was called in by the Argonauts to assist them on an expedition that would lead them past the sirens’ island. As they approached the island, Orpheus heard their voices, immediately took out his lyre and started to play, even more beautifully than the sirens’ song, and the crew managed to sail past the island safely.
In this context, the lyre is nothing more than a well-executed budget. It is extremely important to take a realistic approach to your budget, to help you to stay within its confines as comfortably as possible. With the dire prospect that things will not be getting any easier for South Africans from an economic perspective, it will be the only way for you to sail safely past the tempting “song” of unnecessary expenses and debt.
The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. These opinions do not constitute advice. This is intended as general information and does not form part of any financial, tax, legal or investment related advice. Although the utmost care has been taken in the research and preparation of this blog, no responsibility can be taken for actions taken based on the information contained in this blog. Since individual needs and risk profiles differ, it is always advisable to consult a qualified financial adviser before taking action.