How to Party On a Budget

#December #partying #finance #personalfinance #budget #financialplanning #insurance

Most people seem to hate the word "budget" or the concept of doing something with a budget. For most people the term budget symbolizes living life with limits and restrictions this is due to the fact that they believe that a budget prevents them from doing whatever they want to do. This is, as we will explore below, not true. On the contrary a budget offers the exact opposite, freedom and no restrictions. Restrictions on money do not necessarily translate to restrictions on what we can do with our lives. Smart investors and financially savvy people all know that a budget is one of the most useful tools to construct the life that you want to live. In this post we will be looking at how to construct a good budget for the holidays, especially the festive season and the various financial challenges that come with it.

The festive season simply put is a time when people feast and live a life of excess hence the term “festive”. It is a festival of food, clothes, cars, friends, laughter, joy, happiness, partying etc. If it taste or looks good you can expect people will be indulging in it during the festive season. However with as much positivity as the festive season comes with, it also comes with various negatives. In South Africa it’s one of the key periods where there are high road accidents, grand theft auto, scams and other unfortunate situations. One of the negatives that come from the festive season is also debt, yes, that horrid word that everybody wants to avoid speaking about. December is a month where South Africans also pick up very unnecessary debt along with unnecessary kilos and then just like weight gain attempt and hope to work it out in the new year. For some there is success however for many there is pain and struggle and an endless trap that gets deeper and deeper. Many of us know how bad it feels like in January when there is more “month” than “money” yet we continuously find ourselves in that situation at the beginning of every year. As already stated we are going to be looking at budgeting and how this simple yet effective hack can prevent or decrease the likely hood of us ending up with a damp new year. Let us begin.

A good day to be with friends...when you have a budget

What is a budget?

According to our friend Google, simply put a budget is an estimate of income and expenditure for a set period of time. What that means for us ordinary folks is that a budget is a financial tool that is used to determine how much money we have to do the things that we want to do at a given moment like the holidays (December). The way to create a budget from a book keeping perspective is easy; just create a list of how much money you make (income) and how much you intend to spend (expenses). But because we are not the government and are responsible people we must also leave some money for just in case purposes, this is called a surplus and a surplus is really what we want to have after December is over so we can start the year with a little extra.

So how do we create a budget that will save us from short term financial pain?

Start Microsoft Excel (or any tool you have) and get your spreadsheet out (“boohoo” I hear you say). Excel is one of the most widely available budgeting tools to use and helps to both visualize and plan your finances. We are going to focus on the month of December with the goal of having a surplus in January. It is important to know the numbers as they will serve as the reference point for everything. Most people generally start their budget by looking at their expenses and then determining how much they need to earn or have to cover their expenses. This works most of the time however it neglects the fact that most expenses serve more as “wants” and not necessities and most expenses do not serve the financial goals of the people who set them. They are rather just spending for pleasure or surviving, thus in order to take advantage of the power of budgeting we need to make sure our first set of “expenses” on the list serve a financial goal (in our case creating a surplus) and not just a form of spending for maintenance. To do this, simply start by listing your annual financial goal(s) and the monthly goal that you must achieve to get you closer to that goal. This goal or goals will form the basis of your excel sheet, (anything that contradicts achieving these goals must be challenged and stripped away from the budget). Follow the above by entering essential expenses such as rent/bond, vehicle finance, insurance, medical aid and essential food grocery. There after you will add a section of variable expenses, these are essential expenses who’s cost can be adjusted this would be cell phone airtime, data cost, transport and debt repayments. Food can sometimes fit into this section however it is better to have a fixed food budget and within that budget adjust costs for certain products. Now that you have a list that details your expenditure based on your financial goals, you should be able to see how much you’re most likely going to spend at minimum during December. This data will tell how much disposable cash you have or do not have. The amount of disposable cash you have will be what you use for your festive season wants. If you do not have any disposable cash this is where excel comes in handy, adjust the numbers until you get enough disposable cash to meet your festive needs, bear in mind that adjusting the numbers here means you must adjust them in real life as well not just the spreadsheet. An example is you may adjust your cell phone airtime and data budget because you realize you will visit a lot of places with WI-FI and thus only need WhatsApp bundles. You could also adjust your food budget and realize you will be eating out and so certain meal costs can be covered by your food grocery budget

Here is a step by step of the above instructions (plus screen shots):

1. Input Financial year goal: Create a surplus and save.

2. Add Income from all sources(listed from highest to lowest)

3. Calculate total income

4. Add savings as first expense (this allows you to live on less than you make), 10% to 20% is a good target to save.

5. Add fixed essential expenses

6. Add variable essential expenses

7. Add non-essential expenses.

8. Calculate total expenses

9. Calculate surplus using (Income minus expenses)

You should now have a clear picture of how much money you have as a surplus or lack of it. This is a good indicator of financial health. It is one of the key metrics used by various financial institutions to determine affordability, so do your best to pump this number up. We will post a practical guide on how to do that in January. One more important thing to note is that avoid using your surplus income to buy into expenses. It is an unfortunate habit that when people have extra money they tend to use it to kill what gave them that extra income which is having low expenses in ratio to income. If you want something like a car or house, look into saving your surplus towards buying that cash, a crazy idea however it will not just save your life but your family’s life as well in the long term however that is a topic for another day. Your surplus can also be used to pay back debt faster which is great to free up your future cash flow and use it to invest in making more money however since it’s the holidays your plan might be to just spend your surplus, so how do you do that without financially ruining your start of the year. Let us look at that now…

First thing to do before you spend your surplus is to determine your expected expenses for January that will occur between January 1st and your next pay day. One of the core reasons people financially struggle in January is that there is a huge amount of days between their December pay day and their January pay day. People who normally would get paid month end such as the 30th or 31st normally get paid on the 15th or 20th in December and normally people spend the previous month’s salary on the month they enter, e.g.: if you get paid June 30th, your June salary will probably go towards your July expenses etc. Thus when you get paid on the 20th of December and still have Christmas, Boxing Day and New Year’s Eve parties to attend you will probably end up spending a portion if not all of your salary that would have been used in January had you been paid month end December. This brings us back to the gap between pay days, where there was only a 30 day gap there is now suddenly a 40 to 41 day’s gap and that’s how January becomes the longest month of the year. In order to compensate for this there must be a savings for the extra days hence it is important to determine your January expenses and save extra cash accordingly. The extra cash that is needed will be taken from the December pay day surplus. In theory it shouldn't be a lot as December expenses are technically being covered by November’s salary meaning you would have extra money for January however well if you’re human then anything can happen. In an ideal world you would take your December salary and save it until January however we do not live in an ideal world. After you have deducted January’s expenses from your surplus you are now left with money that you can use however you please.

Partying on a budget

You can now take all the lessons you have learned from the above sections and apply them to your party activities. If you find drinks too expensive, do two things, either change where you buy them or decrease the quantity. Eating out too expensive, change restaurants, change what you order or have a braai and spend less. Gifts being costly change where you buy them or change what you buy or the quantity of it. Be free to get creative about how you spend your money, the experiences will be worth it and you will enjoy every minute of your holidays without worry. The possibilities to play with your budget and the activities you want to participate in become endless once you have money that you will not feel guilty spending and that is where the freedom of a budget comes from, it is not feeling guilty about your finances when you are out splurging.

Happy Partying.

- Omega

Remember: Opinions expressed in this article do not and never will constitute financial advice. Every person's financial situation is different, I recommend you speak to a financial adviser about yours.