Is this familiar to any of you?

– Becks I’ll get the Tequila, you get the bills. It can’t be that bad….Ahhhh Becks $ 200 dollars on Marc Jacobs underwear.

– Underwear is a basic human right.

– $78 dollars on lavender honey!

– I felt sorry for the shop assistance she had a lazy eye. I didn’t know which way she was looking, she was looking at me and it was so sad.

– I can’t even talk about this one. A foot spa, what were you doing in a foot spa? Let’s take a break.

– They said I was a valued customer, now they send me hate mails.

– Becks, oh no how are you going to pay $16,262.70 with no job?

– I could win the lottery.

– Maybe you should have a backup plan.

from the movie Confessions from a Shopaholic

It is so important to create a budget based on priorities and not limitations. Let me quickly explain what I mean. What may be a priority for me might not be a priority for you. If you are going to try and limit your budgets this is not going to work. If you are a salary earner or you own your business and you are going through your list of all your costs, it is only a negative mindset. Paying this, paying that, I never have time for myself, I can never do what I want to do.

This discourages the exercise while creating a bad mindset to want to budget in. People generally end up going over their amount of budget as well as not having any reward for actually working. I personally believe that after you have put in all that effort, you should be rewarded. My strategy consists of 5 elements that I priorities first. Keep in mind that every person’s financial situation is different and is dependent on your income, your debt levels, your fixed and variable costs.

The first element is of course YOU, you are the salary earner that has put in the hours or the entrepreneur that has put in the hours and this is the time to reward yourself. You should be the first priority as if you are happy and you are doing what you love first, this exercise becomes very easy. I normally allocate 15% to do what I enjoy and go crazy, but please use this money. Don’t be shy as this is going to open your mind to a positive mindset regarding money.

The second element is your future. Perhaps you are trying to save money for a deposit to buy or build your dream home, or you are trying to start a retirement fund through a diversified portfolio, or you want to save money for your children’s education or perhaps you want to save money for that upcoming dreamy holiday. Whatever the reason, I would recommend to try allocate a good portion of your income, around 25%. You could for example invest 20% for your retirement and save 5% for a holiday.

The third element is your fixed costs. Here you need to limit your fixed costs to the essentials. Your rent of course or your bond if you own the property, your debt orders that you have to pay, etc. These should be about 30% of your income. Some of you might have more due to your debt levels or since you are taking care of additional people in your family. Unfortunately, here you might have to decide where you can get the shortfall. If this is the case, you might have to reduce some of your variable costs.

The fourth element is your variable costs.  Variable costs are the things that you should be able to control. This is where you need to evaluate where you can save money. This is the only category where I want you to place a very strict limitation on.  Variable costs might be the area where you are leaking money, for example, your food and entertainment bill might be way to high. Find out what you can reduce, so that you can save money and allocate funds to other more important categories like paying off your debt to reduce your fixed costs, allocating more money to your savings and investment category or emergency funds. Ideally, you would only allocate 15% of your total income to your variable costs.

Lastly is the emergency fund. This is an essential part of your personal budgeting strategy. You cannot assume that you are always going to have your salary, even as an entrepreneur you might have smaller launches or seasonal sales. This is where having an emergency fund can get you through the couple of months you struggle with. I would recommend adding 15% to an interest-bearing account which is one-third of your total monthly fixed and variable costs. Meaning every three months you would have saved one months’ worth of your total fixed and variable costs. In a year that would equate to 4 months buffer and two years would result in an eight months umbrella for those rainy days.    

So just to recap those important numbers, 15% is paying yourself and doing what you want and love first, 45% is your fixed and variable costs, 40% is your investment and savings.

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Can I pour you a glass of wine?