Creating a budget (and sticking with it) – On the Money with Jarryd Neves

Jarryd Neves
On the Money. Budding stock market investor Jarryd Neves, of BizNews, sends out an invitation to everyone who wants to ask questions about share investing – but is too embarrassed to ask. Write to [email protected] And tune in for his regular Monday column: On the Money

Mention the word ‘budget’ to someone who’s just landed their first job and their smile will quickly dissolve into a frown, with eyes as dead as the night. Yes, budgeting is a rather boring – but essential – thing that we all should do, but don’t.

It may not be exciting or allow you to blow your payslip as you wish, but it does teach you to manage your money and gain a modicum of financial discipline. Perhaps a less dreary way to describe a budget is to call it your spending plan. Working out how much you’re prepared to spend and save each month can simplify things and ensure that you’re always covered for the essentials.

Staying in all weekend may be dreary, but having enough groceries to last you till the end of the month is far more appealing in the long run. You can also use a budget to eventually afford the things that are currently out of reach. By calculating how much money you spend on specific items, you can strategically cut or lessen your spend in specific areas (maybe entertainment or travel) to save for something like a holiday or a much-needed new appliance.

You can also apply that rule to pay off debt. Of course, if servicing debt is currently a part of your monthly spend, it will undoubtedly be part of your budget. But by cutting from certain areas, you can perhaps pay off that debt quicker – giving you more money to play with in the end.

It’s also important to track your spending. There are numerous apps that help you with this, but simply keeping receipts or using an Excel spreadsheet will help you with this, too. Not only will it make it easier to track where you spend (and what you spend on) but many people – myself included – only realise the extent of their spending once it’s in black and white.

So how do you set out a budget? The first thing would be to set out your expenses and work from there. Yes, you may want to go overseas or do home renovations, but be realistic with those goals. Look at your budget and see if you can save for something like that in a year or two, not a couple of months.

Remember that setbacks are a part of life. Cars need repairing, medical bills come out of nowhere, and school fees need to be paid. While it’s best to set aside some emergency money – that you can work with should something happen between paydays – it’s easier said than done.

Keeping your needs apart from your wants are important, too. Make sure that your essentials and needs are taken care of first. It’s no good splurging on a new pair of shoes and a fun night out when you still have a car instalment to pay and groceries to buy. By all means, set aside some cash for fun – but only after the serious things are taken care of.

After a couple of months, sit back and evaluate whether your budget has worked for you. See where you can make improvements – perhaps to save even more money. Also, remember that while most expenses are monthly, there are those pesky annual fees that sneak up on you every 365 days. Whichever month that expense may fall into, ensure that you have budgeted enough to cover those fees, whatever they may be.

Last week, I asked you to send me your finance and investment queries. Here, Johan Steyn, CFA* of Stellenbosch University, and Arin Ruttenberg* of Brenthurst Wealth Management, share their expert advice by providing answers to your questions.

Condry Lubisi asked,

I have always wanted to invest in the stock market, unfortunately, I do not know where to start (or how to do that). Please advise and help with the guidelines on how I could put together a portfolio and start my journey as an investor.

Johan answers,

I think you’d be surprised about how many people are in a similar boat. I think what most people struggle with, is spending less than they earn, so they struggle to save enough to start investing.

That is the first step: spend less than you earn and save the surplus. The good news is that you don’t have to wait until you have saved a large amount before you can start investing. With low-cost investment platforms, such as EasyEquities, it is possible to start investing even with small amounts. Once you have opened a brokerage account (which is as simple as going through the FICA process), the fun begins.

You need to decide in which securities or funds to invest. This could be a daunting task, given the vast number of options available. In the beginning of your investment journey, I would caution against investing in specific shares. Not only is it difficult to choose which ones have the best prospects, but your portfolio will also be quite concentrated and risky if you only invest in a handful.

Luckily it is possible to invest in exchange traded funds (or ETFs), which provides access to a diversified portfolio of shares, even with a small amount of capital. There are many ETFs to choose from, but I would suggest you opt for one that gives you broad, diversified exposure. It is a good idea to do some research and read up as much as you can. This will help your decision-making process a great deal.

Falyn asked,

I’ve got R70,000 worth of credit card debt. I’m relatively young and have no life savings as yet. It’s time to get my act together. Please advise me on how to proceed, clear this mountain of debt, and get on track with my finances?

Arin answers,

I’m going to take you back to the basics – Wealth Creation 101, which is comprised of three pillars, each representing the foundation to this metaphorical building of wealth. Each pillar, however, does follow a specific order which is detailed below:

Pillar 1: Pay off Debt

Debt is one of the single biggest financial headwinds facing South Africans wanting to build wealth. Do note, however, that there is good debt and bad debt. Good debt is using the bank’s money or leverage to buy an asset that appreciates and bad debt is using the bank’s money to buy things that do not appreciate in value, such as holidays, or items you want but do not necessarily need. The items decrease in value, yet the debt used to purchase it comes at a high cost in the form of high interest rates, at the moment ranging anywhere between 17%- 21%.

Should you have more than one credit card, it may make sense to pay off the one with a higher interest first, and within your budget, of course.

Pillar 2: Start an Emergency Fund

It’s recommended to have at least three to six months’ worth of living expenses as an emergency fund. This money must be saved in an interest-bearing account such as Money Market which is immediately accessible. Your target amount is personal but the cash is used for the same thing: only unexpected emergencies that your day-to-day budget does not cover, such as your freezer packing up, or having to cover the excess after an accident. I am assuming you are covered for risk, such as medical aid and short-term insurance cover. Another reason for this fund is to avoid utilising your long-term investments which need to remain untouched.

Note: you do not have to contribute 100% to pillar one but, for example, can contribute 80% and the remaining 20% to pillar 2. Again, this is all personal and – depending on your specific circumstances – can take a few years to complete. Stick to the goal!

Pillar 3: Start Investing

Now the fun begins! You can start building your income-generating assets so that they can cover your expenses in future. This can be intimidating as there are many ways to invest but the most important part is to make sure to have a bulk of your long-term investments in equity (i.e shares) which grows three to four times that of cash, but not without risk, which means time is your friend as these are designed to be held for long periods of time (10 years +).

You can buy shares directly through a stockbroker or an online platform via an Exchange Traded Fund (ETF), or through unit trusts, and they can be held within tax-free investments, retirement annuities, and straightforward discretionary investments. My recommendation is to start with a tax-free investment which can be done through a stockbroker such as EasyEquities, Satrix or an asset management platform, such as Sygnia or your bank.

The formula is simple: spend less than you earn and invest the difference (at least 15% of your salary, if possible.) Try to keep the same lifestyle, as this will enable you to save more as more disposable income becomes available. A trick is to think of the money in ratios, not numbers (e.g. the 15% mentioned above will always mean a higher allocation to these investments as you earn more without thinking).

Do make an effort to settle the credit card debt, but do not delay starting with savings and investments.

The above can be done by yourself but it is advisable to navigate your financial plan with the assistance of a qualified financial advisor.

  • Johan Steyn, CFA is a lecturer in Investment Management from the Department of Business Management at Stellenbosch University. He holds a Masters in Investment Management and has a background in Fund Management. Arin Ruttenberg is a financial advisor at Brenthurst Wealth Management.

Have a question about share investing? Write to me at [email protected].

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