With July being the month of savings, our focus in the coming month will be centred around how one can bolster their savings and grow their wealth by adding or following simple principles of personal financial management.
We will cover four main topics which are pertinent to boosting your savings and analyse each topic, these are topics any individual would have encountered at some point in their lives namely; budgeting, emergency funds, savings and investments, and debt management.
Personal financial management is one of the fundamental ways an individual can achieve financial freedom which is often overlooked. However this is not an easy exercise, as it requires a commitment to your financial goals and being disciplined as you work towards them.
The importance of personal financial management it allows an individual to identify trends, identify excessive spending and put measures in place to rectify some of the spending. Identify available cash for investments, enabling the effective management of debt, and also allows most importantly identifying if you are on track to achieving your personal financial goals.
This brings us conveniently to a very important part of personal financial management, budgeting. The process of budgeting is quite an onerous and some would say boring, but it is necessary.
The process of budgeting reflects spending decisions made by household, budgeting involves making spending decisions in a more conscious manner and prioritising these decisions in terms of importance. Budgeting is vital as it exposes areas where income is being used inefficiently, and also assists with the overwhelming feeling one gets when considering their financial circumstances.
By preparing a budget an individual allows themselves to realistically plan for both current needs and future provisions, as people we often loathe drawing up budgets as it is considered an arduous exercise. However it is worth effort as there are plenty benefits associated with having a realistic budget, including:
- Assists in having an effective financial planning strategy
- Identifies financial problems early
- Identifies available financial resources
- Prioritises spending by ranking importance of expenditure
- Develops financial responsibility
It is important to realise that the budget you draft is your responsibility to follow through with, by remaining accountable to your budget you allow yourself to actually achieve your financial goals. When drafting your budget there are a couple of steps one can consider;
1. Preparing to draft the initial budget
This requires that you gather all relevant information, all recorded expenses, all income. If you do not have this information consider keeping record of all expenditure.
2. Calculate estimated income from all sources
Consider all income from all sources, whether it active or passive income. These needs to be done on a month to month basis as income from different months may vary.
3. Calculate all expenses
Categorise all expenses by differentiating between all fixed and variables expenses, personal and household expenses. After doing that prioritise the expenses according to importance, this will also allow you to make a forecast on how the expenses will be in the coming months or year.
4. Compare expenses and income
Comparing expenses with income makes it easy to see where you spend unnecessarily, and in excess. It allows you to analyse whether you are living beyond your means or not, and you can also see how you are actually allocating your financial resources.
I personally prefer reviewing my budget on a quarterly basis, however long you are comfortable with reviewing your budget, it is important as you can account to where the spending is going and where you can change.
The crux of a budget is imperative as once you have drafted one, you are able to free up financial resources, which can be redirected to your savings and investment and allow you to start building your financial and wealth plan.
Sources; Financial Planning Handbook 2019.