Crafting a Budget That Works: A Step-by-Step Guide for South Africans

Do you find yourself in the red at the end of the month but don't know why? Drawing up a budget is a fundamental process in personal finance management that can help you control your spending, save money, and reach your financial goals. With a unique set of economic challenges, from fluctuating exchange rates to varying income levels, South Africans are increasingly recognising the importance of personal budgeting. Here's your step-by-step guide to drawing up a budget that aligns best with the South African context.

Understand South Africa's Economic Climate

Before diving into the numbers, it's crucial to grasp the economic environment you're operating in. In South Africa, factors like inflation, unemployment, and interest rates can heavily impact your personal finances. Be aware of the current economic indicators, as these will influence your budgeting strategy. 

• Read the News: Stay up to date with inflation and interest rates.

Set Realistic Financial Goals

Whether you're saving for a bakkie, planning a holiday to the Drakensberg, or putting money aside for your child’s education at a university like UCT or Wits, setting goals is the first step. Your goals should be SMART: Specific, Measurable, Achievable, Relevant, and Time-bound. Tailor your goals to fit the South African cost of living.

• Make Sure Your Goals are SMART: Specific, Measurable, Achievable, Relevant, and Time-bound.
• Classify Your Goals: Divide them into short-term (goals to be achieved within a year e.g. saving for a vacation), medium-term (goals for the next one to five years e.g., buying a car), and long-term (goals beyond five years e.g. saving for retirement).

Gather Your Financial Information

Collect your payslips, bank statements, and bills. If you have multiple income streams, perhaps from a side hustle or rental income, include these too. Don't forget to factor in annual expenses like car licence renewals or your TV licence fee.

• Collect all your income documents.
• Collect invoices and slips for common, regular expenses.

Calculate Your Income

Total up your monthly income after tax—your 'net income' or 'take-home' pay. In South Africa, this may include your basic salary, any bonuses, and allowances. If you're among the many South Africans working in the gig economy, estimate an average monthly income based on the past three to six months. Whether you are a salaried employee, self-employed worker or retiree, make a detailed list of your income: salary, tips, bonuses, commissions, annuities, investment income, etc.

• List Your Income. If you have income from more than one source, make sure you calculate the total.
• Calculate Your Net Income. Use a tax calculator (like Tax Tim's free calculator) to calculate your take-home salary after tax. You can also look at your recent payslips to see the exact number.

Detail Your Expenses

The problem with tracking expenses is that there is often a gap between expectation and reality: what we think we spend is often lower than what we actually spend. The only way to accurately gauge what you spend, is to look at the cold, hard facts in your bank statements. 

Making a list of your expenses may be a bit challenging at first, but knowing where your money goes is the key to effective financial management. Of course, you know how much you spend on your rent or mortgage, and you know roughly how much you spend per week on groceries. But then there is everything else—and that's often how you end up in the red. To get an accurate picture of your spending, do the following:

• Understand Fixed vs Variable (Discretionary) Expenses: Fixed expenses are the non-negotiables, such as your home loan or rent, vehicle repayments, insurance, and utility bills. Fixed expenses are generally deducted from your bank account via debit orders, so an easy way to make a list is to look at all the debit orders going off from your bank account in the first few days of the month. Variable expenses are expenses which change from month to month, including groceries, entertainment, and dining out. 
• Go Back One Year in Your Bank Statements: Print account and credit card statements for the last 12 months or ask your financial institution for them. This will give you a portrait of most of your expenses and bill payments. Gather up any bills you've kept, as you can use them to record your purchases for recent months.
• Write Down All Your Planned Spending for the Next Few Months: Keep track of every cent. This may seem tedious at first, but the idea is simply to develop a habit that will be part of your daily or weekly routine. Here are some tips that may help: Each time you buy anything, keep the receipt. Whether it's a coffee or a bread, everything should be recorded. At the end of each day, put all receipts in an envelope or folder dedicated to that purpose. Enter your data every day or every week on a computer spreadsheet that will give you the totals automatically. You could also use an automated tool like 22Seven, or those offered by your bank (e.g. Nedbank's MoneyTracker) to automatically classify your expenses.

Consider Which Budgeting Technique is Right For You

There are multiple ways to approach your budget. Here is a comprehensive list of all the common techniques that you need to consider:

• 50/30/20 Rule: Use 50% for Needs: Allocate half of your income to essential expenses like rent, utilities, groceries, and transportation. Use 30% for Wants: This portion is for discretionary spending, like dining out, entertainment, or hobbies. 20% for Savings/Investments: The remaining income goes towards savings, paying off debt, or investing for the future.
• Zero-Based Budgeting: With this method, you allocate every Rand of your income to a specific category until you reach zero. Each expense is justified and assigned a purpose (a "job"), ensuring that no money is left unaccounted for.
• Envelope System: You assign cash to different spending categories (like groceries, dining, or entertainment) and place the money in envelopes. Once the cash in an envelope is spent, you cannot spend more in that category until the next budgeting period. The downside to this technique is that you need to work with cash, which may be inconvenient and unsafe.
• Pay-Yourself-First: You prioritise savings by setting aside a fixed amount for savings or investments before handling other expenses. The remaining money is used for needs and wants.
• Line-Item Budgeting: This involves listing all income sources and expenses line by line, allowing for detailed tracking of each category (rent, groceries, insurance, etc.). It offers granular control over where your money goes.
• The Reverse Budget: Instead of focusing on expenses, this approach starts with savings goals. After setting your savings targets, the rest of your income is divided among other expenses.
• Debt Snowball Method: Primarily used for debt management, this technique focuses on paying off smaller debts first to gain momentum. Once a smaller debt is paid off, you roll that payment amount into the next debt, and so on. Read more on debt management strategies.
• Priority-Based Budgeting: This method involves allocating funds based on your priorities. You start with the most important categories (e.g., housing, education, savings) and work your way down until your income is fully allocated.
• 80/20 Budget: Similar to the pay-yourself-first method, this budgeting technique suggests saving 20% of your income and using the remaining 80% for needs and wants. It’s a simplified version of the 50/30/20 rule.
• Incremental Budgeting: This method involves using last year’s budget as a base and making incremental adjustments based on changes in expenses or income. It’s commonly used in businesses but can be adapted for personal finances.

Cut Back on Non-Essentials

Your discretionary (variable) spending can add up very quickly and you may find, when you look at your bank statements, that most of this spending is not essential. Consider whether you can cut the following spending:

• TV and Streaming Subscriptions: Services like Netflix, Showmax, Prime Video, and Disney+ can add up quickly, not to mention the most expensive of all, DSTV. Ask yourself whether you're still using these day to day and, even if you are, whether you can manage without them.
• Cellphone Contract: Do you need the latest iPhone with lots of data, or can you manage with something cheaper?
• Regular Takeaways and Dining Out: Cutting down on regular takeaways, e.g. from twice a week to once every two weeks, can make a massive difference.
• Daily Coffees: Buying a cappuccino on your way to work every morning? With coffee prices having risen significantly (in Cape Town you can easily pay R40 per coffee), taking coffee in a flask instead of buying every day can make a big difference. Invest in a nice thermo flask and make coffee at home.
• Home Internet: If you have fibre at home, do you need a fast internet line, or can you downgrade to something cheaper?

Prioritise Savings and Debt Repayments

It's no secret that South Africans have a high debt-to-income ratio. Prioritising savings and reducing debt is essential. Include savings in your budget as if it were another bill, and consider strategies to pay off debt faster, like the avalanche or snowball methods. 

Stick to Your Budget

Use a spreadsheet or one of South Africa’s budgeting apps (like 22Seven) to keep you on track. Regularly monitoring your spending will help you stay within your budget and signal when you need to make adjustments. Consider using budgeting software or apps for real-time tracking and analysis. Spreadsheets can be a powerful tool for those comfortable with them

Take Stock: Review and Adjust Regularly

Life changes, and so should your budget. A salary increase, a new baby, or a change in interest rates will require a budget update. Keep it flexible to accommodate the ever-changing economic situation. Taking stock regularly is a crucial step. Whether your budget is balanced, in deficit or showing a surplus, it's important that you set realistic goals. 

• If your budget is balanced… Congratulations! Maybe you can optimise it by analysing the distribution of your expenses. For example, the maximum percentage spent on housing should represent 35% of your gross income. Depending on the result, you may decide to save a little by reducing some of your expenses. Or realise that your car is costing you more than you thought.
• If your budget is in deficit… Don't be discouraged. At least you now have a clear idea of your situation, which is the first step to taking financial control. Several solutions are available: cut back on some expenses, and lower your credit and interest costs. The important thing is to go slowly and set realistic goals. Don't hesitate to get help. Debt Sage offers debt counselling also known as debt review services and can assist you in getting out of debt.
• If your budget shows a surplus… Wow, that's fantastic! There are options available to help you carefully plan the use of your extra funds. Would you like to invest, buy a house, and try your luck on the stock market? Anything is possible when you are disciplined, which you already are! Consider getting the advice of a financial planner to decide how to best utilise your funds.

Dealing With Emergencies

South Africa's economic volatility means that you should prepare for the unexpected. An emergency fund is not just advisable; it's essential. Start small if you have to, but start.

Keep Yourself Clued Up

Financial literacy is empowering. Take advantage of free resources (like the one you're reading!), attend free workshops where you can, or join online forums. Newspapers often have money columns, e.g. Daily Maverick's weekly financial wellness column. Knowledge is power; it's your key to financial success.

In Conclusion

Budgeting in South Africa may come with its set of challenges, but it's a critical tool for navigating the economic landscape. By setting goals, understanding your income and expenses, and staying disciplined, you can create a budget that not only works but sets you on the path to achieving your financial aspirations.