For the first time in my life I’m being paid on the 30th instead of the 25th of each month and I can tell you, it’s been QUITE the adjustment! Partly good (I’m less “spendy” on those pay day savings) and partly bad (ADMIN shifting debt orders) – it’s been a learning experience and certainly has made me more mindful of how I spend my salary.
Having chatted to a financial advisor last week about RA’s, medical aids and savings, I thought it would be helpful to share this article about how to budget in 2022 from Monday Today.
Striving for Financial Freedom
Arguably, everyone hopes to achieve financial freedom at some point in their lives, but achieving financial freedom requires a lot of financial discipline. One of the tenets of financial discipline is proper budgeting. A good budget allows you to allocate finances for different aspects of your life, including – but not limited to – personal development, upkeep, emergencies, and savings.
Budgeting is especially important if you are someone who is currently struggling with debt, if this is the case then looking at debt consolidation services will be your best first call. However, you need to have a formula for allocating funds to each of these components. Learn how to budget for 2022 using the approaches discussed below:
How to Divide Your Salary: 50/30/20 Rule
Knowing how to divide your salary is essential to effective budgeting. The 50/30/20 rule is one of the best ways to divide your income. Essentially, it guides you on how much to put into your savings account and spending account. It is effective and sustainable.
The 50/30/20 rule stipulates that you divide your monthly income into three portions or spending categories. These are 50%, for your needs, 30% for your wants and 20% for your debts or savings. Dividing your after tax income into these three categories makes it easy for you to manage your cash more effectively. You can track your expenses easily and avoid stressing over your everyday expenses.
Needs are expenses that you can not live without or, rather, you can not avoid. They include your monthly rent, gas and electricity bills, essential groceries, minimum loan repayments (remember to compare the best personal loans currently available to ensure you are getting the lowest rates), transportation and insurance. Wants, on the other hand, are non-essential spending. They are more or less things you spend money on, but you can live without. They include holidays, dining out, gym membership, non-essential groceries, clothes shopping, and entertainment. Finally, habitually saving the remaining 20% of your after tax income helps you build a savings habit to achieve your goals or settle your outstanding debts.
How to Apply and Automate the 50/30/20 Rule
The implementation of the 50/30/20 rule is a three-step process. For a salaried individual, it is easier to apply the 50/30/20 rule than it is for a freelancer. However, you have to inspect your payslip and add back all the deductions, such as pension funds and health insurance, to the final amount that gets into your bank account. These three steps are:
Determining Your After-Tax Income
If you are not familiar with your tax obligations, you need to engage the services of an accountant to determine your after tax income. Ordinarily, after-tax income differs for different types of earners. For instance, freelancers calculate their after-tax income by subtracting taxes and business expenses from their monthly income. On the other hand, employees on payroll arrive at their income after tax by adding their monthly deductions, such as pension funds and health insurance, to the final amount that gets into their bank account.
Evaluate and Classify Your Previous Month’s Spending
Look at your previous month’s spending to get an idea of where your money goes. Look at the transactions on your bank or mobile money app statements. Sort each transaction in the statement into different classifications such as entertainment, groceries, salary, and food, among others. After this, categorize all your previous month’s expenses into needs, wants and savings or debts. Use the definition of needs, wants and savings or debts provided above.
Assess and Adapt Your Spending to Fit the 50/30/20 Rule
With a clear understanding of how much of your earning goes to wants, needs and savings or debts, you can begin adapting your budget to fit into the 50/30/20 rule. According to this rule, none of the categories in the rule is non-essential. Wants, in particular, are not luxuries or rather should not be misconstrued as extravagant spending. Instead, you should perceive it as the portion of your budget that allows you to enjoy the good things in life. However, if you have to increase your savings, you should consider cutting on your wants and adding to your savings. This is because it is harder to cut your needs.
Automate the 50/30/20 Rule
Dividing your salary more efficiently will boost your financial confidence. Therefore, using financial tools to automate the 50/30/20 rule will go a long way to ensure you are on top of your finances. Some of the essential financial tools you need include a savings goal tracker and an expense tracker.
Budgeting is essentially understanding your cash flow and assigning the right amount of money to your monthly expenses and savings. Once you are on top of your budget you can start to spend more time looking at potential investment opportunities in South Africa. With this guide, you should budget better and achieve most of your financial goals in 2022.
Just this week I was asking a friend to help with my tax submission. It’s incredibly frustrating to me how little lay-people like myself know about money and I highly suggest guidance teachers stop sex education overkill and actually assist us with financial education, driving licence classes, tax submission and LIFESKILLS one can actually use when one leaves the classroom.
I hope this helped you and that we can ALL do better in 2022 – especially after the instability and madness of employment during a pandemic.