Plotting your financial trajectory
When you signed up for this journey you might have wondered if we’d ever drop the “B” word, adamant that if we did that you’d move on, in search of something less predictable and tiresome.
If that’s how you feel, we have some very good news!
When most people think of a budget, they think of continually tracking their spending, like we talked about in the last article. You did that exercise, right? Good.
But to keep doing it for the rest of your life would be a waste of your time and would probably put you off personal finance forever.
No, a budget is simply a plan. The ‘P’ word. No matter how badly you want to reach your goals, and no matter how motivated you might be, you need to draw up a financial plan to make them happen.
Turn your tracking into a plan
The easiest way to draw up a financial plan is to lever off of the exercise you’ve just completed – tracking your spending. This allows you to see money in and money out, and to calculate your difference, your positive or negative amount of cash at the end of the month.
If you did the tracking exercise and found out that you have a negative difference, we’re sure you’ve already identified not living in a cardboard box as a priority, or goal. You’ll never get anywhere without spending less than you earn.
Now that you know what you have to work with, the simplest of plans can be put in place. If all things stay the same, and you spend in the future what you’ve been spending in the past, your monthly difference multiplied by twelve now gives you a picture of how your debt might swell, or your cash might grow over the next year.
How does this number make you feel?
A R1, 500 negative monthly difference is an inconvenience. But over a year it’ll become an R18, 000 disaster! Whereas a R1, 500 monthly surplus becomes an R18, 000 annual opportunity.
How would you feel in twelve months’ time if your credit card balance swelled by R18,000 and your bank now demanded an extra R1,800 per month (10% minimum repayment)?
Had you not had some sense of your financial trajectory, it would be practically impossible to foresee your future dilemma, or to see how much you have to work with.
Evolving your expense tracking
While we’re trying hard to sell you on the benefits of creating a financial plan as a predictive tool, let’s not stop there. Let’s go back and look at the results of your expense tracking exercise.
You’ve now got a pretty accurate picture of what you decided to spend your money on last month. Not surprisingly, most of it was whisked away by an unkindness of debit orders, and about 70-80% of your remaining spending probably relates to some form of grocery or convenience shopping, mixed with a sprinkling of petrol and some “miscellaneous”.
If you have not yet done so, group your spending into categories. There are no wrong or right categories; do what works for you so long as you can extract meaningful conclusions. All the clichés work: groceries, entertainment, bond/rent, insurance, petrol, etc.
Consider your spending for the period. Did you have a number in your head for petrol that was an embarrassing underestimate? How did your grocery spending fare? Are you happy with spending as much as you did on lunch at work as you would have liked?
We want you to recognize that coming up with a financial plan is not there to constrain you, rather it’s about making the best decisions with your money and allowing you to spend your money on the things that you really want.
“That’s ridiculous. Surely if I’m spending the money myself, I’m spending it on the things I really want – nobody is telling me what to buy.”
Sorry, but no.
It might sound odd, but people regularly don’t spend money on the things that they want. This is because they don’t have access to full information at the time of purchase. It feels great at the time to engage in some impulse shopping, but had you known then that this line of unsustainable spending would mean a personal finance black hole at the end of the year, you might not be so quick to whip out your plastic. There is a disconnect between what people want then vs. what they want in the future.
Some people are very aware at the time of purchase that they don’t currently have the money and they know full-well that their credit card balance is growing, but they find it very difficult to appreciate their current behaviour and how it affects their future selves.
Add some personal finance follies, like believing that the void in your weekend can only be filled with a shopping trip to the closest mall, and it’s easy to see how people are easily swayed into buying things they don’t really want.
Making a conscious decision
If you can realise that your current spending sees you forking out R500 for your morning cappuccinos and R1, 300 for convenience lunches at work every month, all the while sinking you deeper into debt, we feel safe in assuming that you’d far rather start taking your own lunch to work and drinking that less desirable coffee brand that sits in your office kitchen, than be sitting with a credit card balance of R18, 000 at the end of the year.
Hopefully you can see where this article is going. We want you to reflect on the results of your expense tracking and use them to put together a plan that sees you spending your money on things that you consciously choose to, with full information at hand and your goals in mind. Every rand spent has an opportunity cost. You’ll never know that cost unless you build a financial plan that considers your current spending behaviour and your goals.
OK, so how do I put together a financial plan?
It’s as easy as you want it to be.
You could be very content with the results of your expense tracking exercise. You’re happy with how much you spend on various things and satisfied with your monthly surplus. Your surplus, when considered as an annual figure, allows you to meet your short-term goals and long-term commitments. Longer term, your continued surplus means you’re on a sustainable path to meeting future goals in the years to come. All you have to do is keep doing what you’re doing and keep any radical shifts in spending under control.
A slight variation may see you recognising that your surplus is not sufficient to meet your desperate need for a holiday in fourteen months’ time and you’re prepared to forego eating out as often as you do, if it means sipping Piña Coladas on the white sandy beaches of Mauritius. You simply adjust your current spending behaviour and make a choice to forego now for a future benefit.
If you do not have a surplus, or have no wiggle room for unexpected costs, you may see yourself on a financial collision course with your bank manager, with your credit limit potentially exhausted. You’ll have to put goals on hold, sacrifice all but the necessary spending and hopefully engineer your way out of a deficit every month.
Each scenario above can be as complicated or simple as you wish. At its simplest level you commit to adjust your spending in a specific category to save more or make your budget balance. Complexity is added through adjusting multiple categories of spending, reallocating money across your expenses and running a financial plan for longer periods of time.
No matter where you’re positioned above, longer term saving for retirement may be on your horizon. You’ll likely be unsure as to where this fits in and how you’re supposed to budget for those responsible things that your friends all do. We will get there soon enough.
If we can summarise why we’re so crazy about a financial plan:
- You’ll never get caught unawares when large future expenses are due. If you can see them coming and know how your cash balance will grow or shrink up until then, you can plan to meet your commitments.
- If you run your plan for longer than just a year, you can see how planning for bigger, more life-changing events might affect your finances, like having children, down-scaling or even leaving a job.
- If you earn an irregular income stream, having a financial plan will help you manage cash flow mismatches between income and expenses.
- It gives you full access to information, allowing you to make informed financial decisions based on what you consciously want.
Some closing remarks
Your budget is a work in progress. It changes as your goals change and as life changes, but it should not change every time you return from a guilt-ridden shopping binge.
Don’t get too vexed with the complexity of budgeting for expenses that don’t occur regularly. No sane person goes to the dentist every month, but we all realise that dentist trips happen and they’re expensive. The same goes for medical expenses in general, car licence renewals and Christmas shopping. This is why we generally prefer to put together a financial plan that considers the calendar year in advance. We don’t know when we’re going for a doctor’s visit but we’re pretty certain it’s going to happen. Consider it as something that will happen, assign a value to it, and tick it off when it’s done.
Creating an effective financial plan allows you to buy the car you want, or take the holiday you want in two years’ time, but alas this is not an alchemist’s recipe. Cash is not infinite and choices need to be made. Therein lies the beauty of a financial plan. Rather know the impact of your choices before you make them, than be doing so with your face in the palms of your hands, years down the line.
Your financial plan experience will be less than perfect, which is fine. Nobody expects you to consistently meet your goals and dominate personal finance. Even by starting and trying to consider and interrogate your spending, we can reassure you that you are light years ahead of the many people who still have no clue where their money goes or what their difference is.
Start considering your goals. Do you have the positive difference to support them? Do you need to adjust your spending accordingly? Would you rather continue to enjoy eating out as often as you do and forego reaching certain goals, or are you willing to give up some present enjoyment for the sake of your future self? What do you really want?
The Editors –
 In all cases, choosing to spend your money on one thing comes with the lost opportunity to have spent it on something else. While you’ll never know what the future might have held for the decisions you chose not to make, not choosing a course has its cost; what might have been.