ABCs of budgeting # 1 (and no, ‘Budget’ is not a swear word)

I believe it was President George Bush who said: ‘It clearly is a budget. It has lots of numbers in it.’ You may not like numbers. You may not be good at math. You may go as far as saying that life cannot be reduced to mere numbers. But here you are – reading a blog about budgets. Chances are, you did not come here looking for some lighthearted amusement. You might even have had to take a deep breath before delving into it. And yes, breathing is good – drawing up a budget is a rational exercise and it is useful if you can think clearly about it.

If you are a regular reader, you will know that we often talk about the relationships we have with money and how these can influence us, even when we clearly know better. However, having said that, it is not the only reason why you may find yourself needing to take deep breaths when thinking about your budget. You may not have been given the right tools and information and this might have left you feeling embarrassed, at your age and level of occupation, to ask ‘but where do I start?’ In this series of three blogs we will explore budgeting – we’ll look at what not to do (and why we keep on doing it), then we’ll clarify where we are going and finally we’ll look at the practical steps of how we’ll get to where we want to go.

Your financial advisor is here for you. I do not blink and pass judgement on your parents or whomever else you think should have prepared you for adulting.

The thing about adulting is…

Attitude is the make or break factor here and no-one but you have control over this one. If you are going to see budgeting as a punishment, or think of it as being forced to go on a monetary diet, thus denying yourself all things good and nice, you may manage for a while, but you will ultimately fail. If you have a partner of a family you will make yourself and everyone else resentful. If this is what you want, go for it.

Instead. You may want to take the opposite approach. Visualise what would happen if you were able to stick to your plan. So instead of saying there will be no/less you will be saying there will be more . It is easier for the brain to move towards the light of positivity.

A strategy that never works

There are some people who know exactly when their last debit or stop order goes off their accounts. They know this, because this is the time they hotfoot it to the nearest ATM to withdraw all their funds in one go. After all, they may reason, if I have it physically with me, I can have a better idea of how much I actually have and I also cannot overspend!

They then go ahead and spend and spend until there is no more to spend. I hear you, in the back row, giggling uncomfortably. ‘Surely that isn’t (quite) me!” Maybe you don’t draw ALL the money at once, but in ‘tranches’. Or you ‘tap ‘n go’ to wild abandon. The spending may not even, when looked at purchase-by-purchase, seem excessive. It may be the frequency, motivation for making the purchase and the absence of a recording system or plan that makes this dangerous.

There are a few obvious dangers inherent to this strategy:

  1. Cash is expensive. You pay considerable amounts at ATMs for each cash withdrawal. This can be as high as R8 per R100 withdrawn. At this level it doesn’t seem so much, but scale it up….?
  2. It is physically dangerous. This is a method often used by older people who rely on their pension payouts. Unscrupulous predators (sadly, even family members) may become aware of their prey’s movements and wait for them around a dark corner… They may also pretend to need or offer help to an unexpected bank user. The reality is that once the money is gone, it is all gone and you really are in deep trouble.

    Recently this has taken another turn. New chip technology has made it possible for you to ‘tap’ your card for smaller payments, without identification and often without a pin. Though there are limits to these, frequent, small amounts add up! Be careful of who has access to your cards! You may think this does not apply to you, but there may be someone close to you who may need to be warned!
  3. Impulse or unnecessary buying is more tempting. Having cash at the ready without a clear idea of what you should be spending on a particular type of item (and how much you have already spent this month) makes it difficult to make rational decisions on priorities. Your subconscious biases, fears and need to self-soothe will be given greater reign.

    You may think your children can never have enough stationary, so you buy more every month. This makes you feel like you are looking after them and their education. You may have grown up with a sense of food scarcity in your household, so you buy two of everything ‘just in case’, without checking what is in the cupboard first. You may have had a bad week and, come pay-day Friday, you feel you have earned some retail therapy.

Let’s exercise!

The thing about subconscious biases, fears and need to self-soothe is just that – it is largely subconscious. You may well be aware of some of your vices and even joke a little about being a shopaholic, but do you know the extent of it? Put it this way – if you have nothing to hide (from yourself!) investigating your spending habits won’t raise your pulse much, now would it? The point here is that before you can put strategies in place that will STAY in place, you need to know what may make you SLIP UP.

It really is helpful to write your answers down. One, you will be able to look back on these answers and see the progress over time. Two, writing things down shows commitment to yourself. Three, it forces you to take part in this processes mindfully and you may remember more. Four, It helps you get into the habit of writing things down – don’t just think it, ink it!

I spend like this…

  1. Make a list of things you see as priorities in your life. Perhaps health is important to you. Maybe you believe in regularly spending quality time with friends or family. Try to brainstorm these as quick as you can, write down at least five things. Number them in terms of importance to you.
  2. Write down your vices….your guilty pleasures! What are the things you know you should not do/like/indulge in. Don’t worry – this is for your eyes only. Also make a list of five. Number these in terms of the strongest attraction to the least.
  3. Answer these questions in order and in writing (DO NOT CHANGE YOUR ANSWERS):
    1. Do you spend the most money on your priorities or vices?
    2. At rough estimate, for each priority area, how much money do you think you spend each month?
    3. At rough estimate, for each vice, how much money do you think you spend each month?
  4. Take a sheet of blank paper. At the top of the page, write down each priority. Draw lines down between each heading, so that you have a column for each. On the reverse, do the same for your vices. Print out or get hold of a physical copy of your bank statement. With a highlighter, highlight each entry that corresponds to a priority or a vice. Next, write the amounts spent on each priority or vice underneath the corresponding heading. Mark any purchases that could fall under more than one with an asterix and add it under the most likely heading.
  5. Calculate the sum of each column. Tally up all the totals. Take a deep breath. Compare these answers to what you had indicated as your answers under number 3. Also take note of the number of times you spent money on particular priorities or vices and the size of the amount you spent.

Well done!

You are still breathing! I hope you have learnt a few things about yourself and your spending patterns. You may have learnt that you splurge now and then, but tend to spend bigger amounts when you do. You may have noticed that you have some chronic spending habits that may have slipped under the radar. If you really want to ramp up the exercise, you can look at your diary and compare your bank statements to see what that tells you about your spending habits.

Though this is only one part of investigating your financial situation, it is an important one. A lot of people, in my experience, are money optimists, particularly in terms of daily spending.

It would be interesting to hear your feedback on the exercise above – feel free to leave us some of your thoughts in the comment section. If you are a little rattled about what you found out today, don’t worry. You have taken the first step. In the next blog we will look at what is needed to draw up a realistic budget. Remember, these blogs are meant only as information pieces – conversation starters as it were. It is not meant to replace the advice of a Financial Advisor. For those who need to hear it, our first consultation is always free.

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