Budget

In your pursuit to conquer your personal finances, you need to start with a stable foundation. You need to pay yourself first. What does that mean – to pay yourself first?

Think of a frivolous spender. They make 5000, they spend 5000. They work the entire month to only spend what they’ve earned. If you project this over time, they will retire with 0 saved or invested… Living “paycheck to paycheck”. In an eternal endless loop in which you will always be working for everybody else, and never yourself. Do you want to be 65 years old, and still working? Think of an ‘old’ person, a grandmother or grandfather… Think of waking up, at that age, frail, and (if all goes well) without any ailments to then get up at 06:00 to get to work at 08:00. All because you neglected to pay yourself first. I don’t want that for myself, nor for you (hence this piece).

To remedy this, you pay yourself first every month. Before those deductions/debit orders go off, before you pay for a night out or whatever your hobbies or interests are. This is for your future, aimed towards bettering yourself through financial independence. I am not advising you to not pay your debit orders and trash your credit score, but focus on transferring a sum of cash to a savings account when you get paid. It doesn’t have to be a lot. If you can afford 500, then transfer 500. If you can afford 30% of your nett, then save 30% of your nett. Get into the rhythm of saving a bit of money every month to build the habit. We will discuss what to do with said money at a later stage, but start with that.

There are many budgeting options to choose from, such as the 50/30/20 rule, CSP (conscious spending plan) by Ramit Sethi, and many more (google is your friend). These are all guides for you to use. It doesn’t matter what plan you choose, as long as you pick one and stick with it.

Example: 50/30/20

50% Needs
30% Wants
20% Savings and Investments / Debt repayment.

I don’t like this plan if you have debt.

I am going to go off on debt for a little bit because I get EXTREMELY pissed at consumer debt. If you wish to ignore the rant, skip the following paragraph(s).

Debt is a TOOL. A tool to build your credit score, a tool to assist you in decreasing the interest rate on your housing/car bond. Besides that, you should try your utmost best to stay debt free. Some of you may have student loan debt, a necessary evil should the degree/qualification you chose ROI’s (return on investment) on your salary. What do I mean? If you study to become a doctor, generally speaking you will earn a decent wage to offset the price of education. If you end up studying something that will not ensure you get a high paying job to offset BOTH the years of study and price of education, then it is a financial waste. It is a different situation if you wanted to study it only because you enjoy the subject matter, but I am referring to it from a financial perspective.

Consumer debt… People love digging themselves into their own financial grave with this one. I want to preface this with empathy, I understand that the shit hits the fan sometimes. You need to use the credit card for something that’s urgent. The kiddo needs a doctor’s visit and another small fortune’s worth of antibiotics, your car breaks down, or your spouse is fired. People often turn to the credit card for these purchases, especially when they do not have an emergency fund. At those times, you need to do what you need to do.

BUT

For those of you living an extravagant life buying the newest clothes, shoes, and other crap because “you can pay it back later” or “you can’t wait to save up for it”. What happens when you get an actual emergency? What happens when you inevitably max out your credit card because you got too carried away, and now they’re charging you a cheeky 25% interest rate on your maxed out balance? Do you realise that maxing out your card and only paying the minimum amount will take you LITERAL years to pay off. That doesn’t even account for you using that card at a later stage again. Stop using credit for crap purchases. Don’t use it to buy clothes, shoes, electronics, or whatever other wants you have. Save for it, like a financially responsible adult. So you pick: Crippling consumer debt and waking up being 65 years old and having to go to work, or be an adult and choose financial responsibility. Moving on…

Now that we’ve created margin in your budget, we can now work towards financial freedom. “Ok Kyle, I have 2000 saved up. What the heck do I do with it?”

First things first: Emergency Fund. This will be your shield when times get tough. For that emergency expense, such as a blown tyre, dental work, home repairs etc. Note: I did not say, “Drinks out with the boys/girls”, nor “Cousin has a birthday, I should buy them an expensive gift that comes from my emergency fund.” No. Emergency funds are for emergencies ONLY.

Ok, so, how much? How much in an emergency fund? I don’t know. Personal finance is, well, personal. Here are some guidelines:

1x month of your salary. This is how much you should start with.

Next, you should work towards 3-6 months of living expenses. This is for those cases where your or your spouse loses their job, you won’t need to panic and make irrational, financial decisions. This amount should also cover most major expenses, so it is a great goal.

There’s an age old debate, 3 or 6 months? It depends on your life. Are you a salaried worker or a freelancer? Do you anticipate highs and lows in your income or are there times where you might not receive an income at all? If so, I would wager towards 6 months. I’m a salaried worker, and I expect to receive consistent income – should I not get fired (or quit). However, I still keep 6 months of living expenses in my emergency fund because it brings me financial peace. I could possibly invest the difference to get a better ROI on my money, but I believe that this cost (opportunity cost, perhaps?) is worth it.