The missing piece in many personal budgets.
Having a budget is one of the most useful ways to stay in control of your finances. It not only helps to keep your spending below your income, but also allows you to appreciate whether you are spending on the right kinds of things.
In its simplest form, a budget requires you to take your income, and spread it between your expenses. That should also include setting some aside for your long term investments.
However, the problem with most budgets is that while they do a good job of tracking ongoing expenses like your bond repayments, petrol and groceries, they don’t consider your future expenses. These are easily overlooked, but shouldn’t be ignored.
Consider, for example, your car, which needs to be serviced every year. That cost is not an expense that occurs every month, but when it arrives can run to a few thousand rand.
On a more significant scale, you may need to buy a new car at some point. You could, of course, use credit for that, but that would mean spending a lot more on something that, with time, will become worth less and less.
Think of it like a business that knows that certain large expenses are inevitable.
A lodge, for example, is aware that it has to replace its beds every few years. A well-run operation will ensure that money for those beds is accumulated over time so that when the point is reached that they actually need to be bought, the funds are already available.
Just because this is an expense that is only going to occur some time in the future doesn’t make it any less significant. In fact, it may be more so, because having to find a few thousand rand for a once-off cost can throw off the rest of your budget entirely.
Don’t call 911
Catering for these sorts of things is not the same as having an emergency savings fund. While that is a crucial safety net, it should be used for large, unexpected expenses, such as having to replace your car’s gearbox or an unexpected medical procedure not covered by medical aid. In a worst-case scenario, it should protect you if you lose your job by covering all of your expenses for a few months.
Future expenses, on the other hand, are things that you know are coming.
In some instances, budgets do plan for them. Putting aside something every month into a fund for a child’s education, for instance, is a priority for a lot of people.
Holidays are also something that many people are keen to save towards. Saving for a trip over a whole year not only allows you to have a more accurate idea of what you can actually afford, but takes away a lot of the angst of having to use credit.
There are, however, many other things that could be planned for financially. These include your pets’ annual check-ups and vaccinations, repainting your house, attending training courses for professional development, having a baby, and Christmas spending.
The list will differ from individual to individual, and household to household, but if there is something that you know is going to require an outlay of cash at some point, it is a good idea to prepare for it.
The way to do this is to identify the major expenses that you anticipate in the future, and create a ‘sinking fund’ for each of them.
This is a savings vehicle that you add to every month, with the goal of reaching the required amount to cover the cost at the time at which it arrives.
For instance, if you know that taking your pets to the vet for their annual visit costs you R1 800, then you should budget to put away R150 every month. Then, when the date arrives, the money is already available and you don’t need to upset your budget or use credit to handle it.
On a larger scale, if you know that you will need to buy a new car in three years’ time, identify what you are likely to want and project how much it will cost at that point. This could be, for example, R300 000. If you are able to trade in your current vehicle for R120 000, that means that you need to have saved R180 000, or R5 000 a month for 36 months.
Doing this will not only ensure that you are actually considering all of your expenses, but also save you a lot of money by avoiding unnecessary debt. And for that, it is certainly worth the effort.
Patrick Cairns / 27 January 2020 00:04
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)