The beginning of every year is a clean slate. It is an opportunity to start afresh, recalibrate and strategise how the rest of the year is going to pan out.
Failure to budget exposes you to multiple risks that affect you and your loved ones. Budgeting is a sure way of regaining control over your life and maximising any amount of money that comes into your hands or your bank account.
FirstCred COO Ambrose Batsalelwang says budgeting can simply be defined as a comprehensive plan of how to spend your money.
"Different factors determine how one should budget hence the various strategies for budgeting. These can be attempted throughout the year to identify which strategy works best because, in budgeting, there is no one-size-fits-all approach. What works for you may not work for the next person and similarly, what works for the first quarter may not work for the fourth quarter."
He said that the first budgeting strategy is proportional budgeting.
"This is categorising expenditure. A popular technique under this strategy is the 50/30/20 budgeting rule. Fifty per cent of your income is directed towards bills (fixed or variable) such as rent, food, medical aid, car instalments, mortgage instalments, school fees, loans, and fuel expenses among others.
Thirty per cent goes to your wants, that is, clothing, hair maintenance or even home décor but the remaining 20 per cent is dedicated to your savings. If this does not work, the 80/20 rule could be applied. Under this rule, 80 per cent covers both needs and wants whereas 20 per cent is for savings."
He said that the second budgeting strategy is pay-yourself-first budgeting.
"This method prioritises goal-oriented saving classifications such as retirement, mortgage down payments, travel fund and investment over short-term expenditures. It focuses on long-term financial well-being. You automatically
set aside money for financial goals as your income comes in."
The third technique is zero-based budgeting.
Batsalelwang cited that according to Deloitte, “It is a budgeting process that allocates funds based on programme efficiency and necessity rather than budget history,” there is no precedence when it comes to the budget and it calls for the evaluation of every line item in your cash-flow statement.
"This method works well when you have an inconsistent income stream, have over-borrowed or when you have a low income overall. It is called zero-based because you are creating your budget from scratch. This process allows for only critical items to be covered in your spending, supports cost reduction and all the expenses are well justified."
The fourth strategy is envelope budgeting, a method suitable for people who do not necessarily have a large income, a bank account and require a lot of discipline.
"The thinking is that money will be separated into different categories, withdrawn and placed in envelopes. It works best on variable expenses because it is these expenses that cause people to deviate from their budgets."
The fifth strategy, values-based budgeting is a high-level approach to spending as well as saving. Personal values determine which direction funds go in. This process builds financial plans around the budgeter’s priorities.
The sixth and final strategy is automatic budgeting. This is whereby deposits are made into predetermined accounts. These accounts could be divided amongst savings, investments, checking and retirement accounts.
Batsalelwang said that FirstCred recognises the importance of not only equipping customers with knowledge and giving them practical tools that they can use to simplify budgeting, which are also available on their social media pages.