Conversations with Myself – The Money Trap

Man drowning in debt

Do you live according to a budget? Do you live by a financial plan? Do you spend more than you earn? Do you know exactly how much you spend and on what every month?

I was blessed to have parents who taught me the value of money from an early age and this has stood me in good stead as an adult. My parents did not earn very much but both had steady incomes so we had to do the best we could with the little we had. As a child, I only received new clothes twice per year – at Easter and Christmas time.

How did this work? Well, the “outfit” I received for Easter/Christmas (dress, shoes, ribbons for my hair etc) was worn on the day and then became my “Sunday clothes” worn only for church and special occasions. When the clothes became too small, they were worn around the house as “house/play clothes”. Coming home from church, I would immediately need to change into my “house/play clothes” so my Sunday clothes remained in a good condition until I was able to get my next set of new clothes.

Pocket money – when I became a teenager, my parents decided it was time to give me some pocket money to teach me budgeting skills. I was not just given money – I had to work for this money i.e besides cleaning my own room, I had to dust and vacuum the entire house, whenever there was dishes to be washed, it was my job to wash, dry and pack away. For this, I received R10.00 per month. From this R10.00 per month, I could spend it on whatever I wanted to but I was expected to also buy other things like birthday gifts for friends or family etc. So before I could spend my entire allowance on luxuries (like sweets), I had to first consider who was having a birthday or special occasion during that month and find a gift for that person, and then, only what was left, could be spent (or wasted according to my parents) on whatever I wanted to buy. If I ran out of money before the end of the month, that was my problem. There was no advance given under any circumstances. If I forgot about a birthday or special occasion or was suddenly invited to a party unexpectedly, tough! No money for a gift.

When I started working and earning my own money, I had to hand over my entire salary to my parents who then continued buying my clothes (twice per year) and toiletries (monthly) and I was given a monthly allowance (pocket money). My dad bought me a second hand car. Same principles applied as above, the only difference here was that the allowance was increased to make allowances for the fact that I needed petrol money. My dad carefully calculated how much it would cost me to drive from home to work and back every day and added a little extra for going to friends over the weekend. Again, if I ran out of money before the end of the month, tough! You suffer the consequences of your actions – so I made absolutely sure that I never ran out of money (and never ran out of petrol because dad would not come to my rescue if I did).

When I turned twenty one (21) years of age, I was given the option of continuing with the above arrangement or taking control of my own finances and paying my parents board and lodging. I opted for my independence so I was given a figure to pay which would constitute board and lodging (worked out to approximately twenty five percent of my monthly salary). Mom still cooked food but I still had the same chores I had when I became a teenager and had to do my own washing and ironing.

I continued the habit of only buying clothes twice a year. I’ve never owned more than two pairs of shoes at a time. Sandals for Summer and a pair of shoes for Winter (and of course slippers in Winter). My wardrobe was divided into three: Work clothes, Saturday clothes (going out with friends/socialising) and Sunday/special occasion clothes (no special shoes). I was also raised on the philosophy that you have to separate your work wardrobe from your weekend wardrobe so that when people see you on weekends, you have to look different. The same goes for wearing make-up. I was taught that make-up is reserved for special occasions because when people see you on weekends or special occasions they should say “wow! you look different” (in a complimentary way, of course).

When it came to monthly budgeting, my mother taught me a system which worked for her, and since adopting the system myself, it has never failed me. The system is as follows: buy yourself a pack of envelopes (the size that you would put a letter into). On each envelope write what you need to spend money on, example: board & lodging (rent), petrol, entertainment (this could include gifts for friends or you could have a separate envelope), toiletries etc (one item per envelope). I am going to assume that, like me, you will take care of your Medical Aid, car payments and Insurance by Debit Order. Now, look at how much cash money you have available each month and decide how much you have available to spend (cash).

Let’s say your board and lodging/rent is R2500.00, your toiletries R800.00, petrol R800.00 per month. After you have put these amounts into their respective envelopes, how much of your salary do you still have left for entertainment (which includes movies, clubs, drinks with friends etc). After you have split your money into the various envelopes you should know exactly where your money is going each month.

Now the most important part of this principle is that you don’t borrow from one envelope for the other. You have to be disciplined and you have to be strict with yourself. So if you set aside R500.00 for entertainment and you get to the middle of the month and there is no more money in the envelope, it means that you have to stay at home for the rest of the month or you need to find more creative ways of entertaining yourself for the rest of the month. You are not allowed to “borrow” money from any other envelope. If you run out of petrol money in the middle of the month, you have to find other creative ways of getting around (public transport, walking, hitching a ride, lift club etc).

At one place I worked, my Manager actually taught me how to take this one step further and this is what she used to do. She bought herself a little A6 sized black hardcover book. She would write the month on the top of each page (one page per month) and the rule here is that you are not allowed to tear any pages out of this book. Every time she opened her purse to spend money, she would write it down in this book – so even if you are only buying a packet of sweets, you would write it down. At the end of each month you would be able to add up exactly how much money you are spending (wasting) on take away/junk food, etc and you would be able to make the necessary adjustments to your budget.

Categories of Expenditure:
Fixed Compulsory Expenditure (Amounts to pay every month which do not normally change). Examples: Home loan/Rent, Motor Vehicle Finance etc

Variable Compulsory Expenditure: (Amounts paid every month which can fluctuate). Examples: Transport/petrol, telephone costs, household/food, utilities, entertainment, clothing etc

Discretionary Expenditure: (Give yourself a “treat” expenditure). Examples: Entertainment (going to the movies, buying a CD/DVD, luxury items (jewellery) etc

How do you budget with reasonable accuracy?
• Determine your actual level of spending right now (my example of the envelope system)
• Keep a record of every expense you have for the next month (my example of the little black book)
• Start and maintain a budget for the next month of all the main expense categories (use the envelope system as a guideline). Don’t forget to provide for unforeseen expenses
• Summarise your actual expenses for that month (do a spreadsheet on the computer), by category against the budget amount for step 3
• Re-assess and review your budgeted amounts for the next month

So, for example: If you decide that R500.00 is a fair amount to spend on entertainment for the month, keep a record of every time you spend money on entertainment (in your little black book). At the end of the month, add up all the amounts you recorded and see if you stuck to your budget of R500.00 or if you spent more. Look at why you spent more. Was it really necessary?

Where to make changes:
• Savings – the most important item in budget
• Savings for emergencies – amount depends on how much you earn
• Fixed compulsory monthly expenditure – this does not change much
• Variable compulsory monthly expenditure and discretionary expenditure – large savings can be made

Your current monthly budget:
Avoid debt – don’t purchase depreciating items on credit (fridges, stoves, microwave ovens). Example: You purchase a Defy Stove (without paying a deposit) with a 36 month payment plan. Your monthly instalment (for example) is R223.32 per month x 36 months = R8040.60. The cash price for the stove is R4499.99. This means you have paid R3540.61 in interest which means you have been charged 42.5% (percent) interest which you could have saved to spend on something else. The estimated value of this stove after three years would be: R1500.00.

Don’t forget, the financial guru’s will usually tell you that you have to put away at least 5% of your monthly salary for saving for a “rainy day” (long term savings) and you also need to put away some money for an “emergency fund”. The formula the financial guru’s will usually give you as a guideline is as follows:-

Please note this is a guideline only and should be adjusted according to your take home salary. Also remember, the percentages allocated must add up to 100% at the end and the money you allocate to each category must add up to your total available salary at the end. Example: if you earn R10,000.00 per month, this is equal to 100% (percent) of your salary. If you spend 25% (percent) for housing expenses (Bond/Rent) it means you are spending R2,500.00 on housing expenses, you have 75% (percent) of your salary left for other expenses.

Here’s the Spending Guideline:
• Housing expenses (bond/rental including levies) = 25 – 30% (maximum)
• Vehicle Finance = 15 – 25% (maximum)
• Groceries = 15 – 20% (maximum)
• Transport (bus/train fare/petrol) = 8 – 10% (maximum)
• Medical expenses = 5 – 7% (maximum)
• Insurance/Pension = 7 – 9% (maximum)
• Clothing = 6 – 8% (maximum)
• Entertainment = 5 – 9% (maximum)
• General savings = 6 – 10% (maximum)

So how are you doing in terms of your financial management? Are you on track or do you need to make a few adjustments? Where does most of your money go?

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