When it comes to money there are only certain things you can control. One of which is how much money you spend. Whether you earn a big salary or count your pennies you can control the amount of money flowing out your wallet.
Controlling your expenditure successfully always starts with the dreaded B word: budgeting. No one likes the admin of checking their bank statements or facing the black and white truth of just how much they spend on certain things. But it is probably one of the most important parts of the financial process you have to take control of.
The budgeting approach we use is called the 3 Buckets. It’s a simple process where we break your expenses down into three buckets: Needs, Wants & Wishes. Your Needs bucket will contain expenses such as your bond, life insurance and food. Wants will be the luxury items such as DSTV, Netflix, Fibre, domestic workers etc. and Wishes will be the once-off holidays, hobbies and home renovations.
Anybody can use this approach. It is best to use actual bank statements covering a period of 3 months or more. Then break your spending down into an excel sheet or table. When you know how much you spend in each bucket you can start to adjust your expenses and rein in your spending habits if necessary. This is the single biggest tool you have at your disposal.
Our Budget Template can be found here.
This approach is especially useful for people who live off a fixed amount of monthly money, like retirees. The graphs below illustrate two different retirement strategies. In the first one, the monthly income drawn from the assets stayed the same and adjusted upward by inflation each year. As you can see, the person ran out of money within 20 years. In the second strategy, the draw down was more flexible and could be adjusted in periods of low growth. This meant less money for wants and wishes in certain years, but the long-term effect was that the money lasted the person’s lifetime. Being flexible with the amount of money you need could be the one thing that ensures your money lasts your lifetime.
Many people think that saving money means they need to adjust their lifestyle drastically. We strongly believe that if you do this budgeting exercise you will be able to figure out an amount you can save without compromising lifestyle expenses, such as needs or wants. If you don’t save any money the best approach would be to start small and get used to the concept of saving. Once you build up a savings account you will be able to pay for various expenses in the wishes bucket from this account, rather than using your credit card.
True financial freedom means that you can stop working tomorrow and that you have enough assets – whether in investments, retirement policies or properties – to provide you with an income for the rest of your life. We typically believe that our salaries are the drivers of financial freedom. However, if you don’t save a portion of your salary today, you will need to work for that salary as long as you need money. So, in fact, it is your financial budgeting and savings that truly buys you financial freedom.
We strongly believe in creating Wealth for Life. But, to do the things you want to do during your lifetime you need to have the capacity to do so. Therefore, we believe you need to control your needs and wants and save the rest in order to truly tick the wishes off your bucket list.
As Joe Biden once said: “Don’t tell me what you value, show me your budget, and I’ll tell you what you value.” Make sure your budget reflects the things that make you happy.