Do you remember the first time you received pocket money? Of course you do! And do you remember what you bought with it? I was about four years old and all I wanted to buy was sweets. But I wanted to buy as much as possible with the amount of coins clutched in my hand. My first task was to check the prices of all the sweets that looked great, then work out what I could buy and sadly, what I couldn’t.

These were my first budgeting lessons:

1. You can’t have everything in sight because you don’t have enough money

2. There is a balance between the money you have and the cost of things

3. If you want a more expensive item you have to save for a few weeks

It’s easy to budget when you are working with cash only.  You can divide your money into portions for items such as groceries, travel costs, electricity, school fees, savings, etc. Put these amounts into envelopes and be sure not to use the allocated money for anything else. Believe it or not, people still do this quite successfully!

However, the natural laws of only spending what you have and nothing more have been altered somewhat by the introduction of spending on credit. This is where most people without a written budget encounter challenges.  

Finances can become complicated but the easiest way to simplify it is to write everything down. Once you have everything in black and white you can assess the situation and you will be able to take the necessary steps to improve it.

Step by step, simple DIY budget

1. Draw a vertical line down the middle of a blank page

2. On the left, list all your monthly expenses. Start with fixed expenses such as your rent or bond, insurance, school fees, retail accounts, credit card payments, etc. Then move on to estimated expenses such as food, petrol, clothing, electricity, etc. If any of these items are paid by your employer before you receive your salary, don’t include them (e.g. tax, pension and medical aid). Don’t forget to add sneaky little expenses like bank charges or parking fees. Write everything down!

3. On the right, write down your net salary, this is the amount that is paid into your bank account every month. If you receive any other income, list it here too. An example of other income could be rent you are charging a lodger or profits from a small business.

4. Add up the left column and total it at the bottom of the items.

5. Add up the right column and total it.

6. Hopefully the right column totals more than the left, which means that your income is greater than your expenses. Does it?

This is a very simple budget exercise but it gives you a clear picture of your circumstances on a monthly basis. You may find that you need to adjust it constantly. Perhaps you forgot something, or estimated the cost of something incorrectly. Don’t feel bad, this happens to all of us!

If your income is more than your expenses you should open a savings account and transfer some of the surplus into it. This will ensure that if your car breaks down or your child needs new school clothes that there will be money available and you won’t have to use your credit card. If you don’t have to use credit for emergencies it means that your credit card and retail accounts will soon be paid off. Isn’t that something to look forward to?

If your income equals your expenses, congratulations! You have what is termed a ‘balanced budget’. Hopefully, one of your expense items is a savings amount transferred to a fund every month. Otherwise, you might find that during some months unforeseen expenses will unbalance your budget and you may have to resort to using credit. Don’t let that happen!

And finally, if your expenses are more than your income, then you need an SOS plan. Carefully check all your expenses and determine which are nonessentials that you can live without for a little while. For example, cancel the satellite TV subscription. Don’t shopping for clothes for six months (most of us want new clothes but don’t need them). Another option is to get a second job to increase your income, such as becoming a waiter in the evenings, selling Tupperware or home baked biscuits. If, however, your budget has shown that your credit card and other debt are out of control, you will have to scale down your lifestyle until you recover from this.

Some ideas for down scaling your lifestyle if your budget is out of control:

1. Rent a cheaper home or move in with a friend or family

2. Sell your car and use public transport or rely on lift clubs and family

3. Cancel all subscriptions that you don’t need (satellite TV, magazines, sports clubs etc)

4. Speak to every contract service provider about how to reduce your payments. For example get quotes on cheaper insurance, downgrade your cell phone contract (you can remove caller ID and other add-ons and get a cheaper contract), talk to your landlord, etc. If you are a good tenant he may consider helping you out for a while by reducing your rent.

You will never know if you can get things cheaper if you don’t ask. This applies to all budget scenarios, not just to those who are in dire straights. In any situation where you can save yourself some money, it will enable you to add to your savings. Having a savings account (which will eventually become an investment portfolio) is the first step towards financial freedom.

If you do not already have a budget, stop what you are doing right now and use these tips to design your very own blueprint to financial well-being.

What were your first budgeting lessons? Share them with our readers...