A GPS has a very simple function, getting you to your end destination. It works very simply off satellite coordinates that triangulate where you are, if you choose a variation of destination it will give you options of the quickest route. Our Wealth GPS works in exactly the same manner. We need to understand what your starting point is (Your Personal Budget), what your end destination is (Your Financial Goals, Retirement Plan or Financial Independence Date) and then lastly how to tackle the journey (Your Wealth Creation Plan).
The first step in achieving your financial freedom is to start budgeting. I’ll not bore you with accounting principles. And no, you do not need an accountant to do basic budgeting. Now coming to the bigger question – do you keep track of your money? No, I’m not talking about “abnormal” or unusual expenses such as buying a car, buying a new refrigerator, or organising a wedding. Indeed, these expenses are outside of your normal routine and highly unpredictable in terms of timing and planning but you can still include these as a part of your budget. So, hold on to your horses, and let us prepare your budget.
Step One: Track your monthly spend
Most of us have no idea how much we spend each month. The quintessential component of budgeting is to keep a tab on your monthly expense.
Step Two: Track your annual expenses
Some bills will have to be paid once or twice a year such as paying property taxes, holiday shopping, and visiting a dentist. Divide such expenses by twelve to find out your monthly budget for that item.
For example, if you spend R3,000 per year on gifts, your monthly budget is R250 per month.
Move that money (in our case, R250 per month) into a savings account, earmarked for ‘gifts.’
You can even withdraw this money and keep it somewhere else. Just be sure to stash it and hold on to it
“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.”
– William Feather
Step Three: Track Your Once-in-Five/Ten-Year Expenses.
The bigger expenses often catch you unguarded. For example, you may need to repair your house, need a new car, etc.
Rather than financing these expenses at a later stage, it is a good idea to make a payment to yourself every month, at first, it might look like it is impossible to do.
Calculate how much such once-in-five/ten-year items will cost. Divide it by the time frame and earmark this amount as ‘pay yourself’ every month.
For example, You want to buy a car worth R250,000 four years from now. This means you have to save R5,200 per month for the next forty-eight months. Set up an automatic monthly transfer of R5,200 from your cheque account to a savings account.
Of course, you will also save for other personal goals like R750 per month for vacation, R250 per month for the new roof; net-net, the total amount being transferred is significant.
Step Four: Track Your Once-In-A-Lifetime Expenses
Okay, we are not done yet. The biggest amount you will have to shell out will be your once-in-a-lifetime expenses like University Costs, weddings, etc.
Save for these by determining how much it will cost, and divide it by the time frame.
For example, if you want to earmark R500,000 towards your child’s university expenses and if your child is currently 6 years old, they will go to university in twelve years from now, which is 144 months.
Now divide R500,000 by 144, which equals to R3,472. This means you will have to save a minimum of R3,472 per month in a university fund.
However, the interesting thing to note is that twelve year from now, R500,000 will not have the same purchasing power as today. Factor in inflation in your calculations and compensate for it.
For instance, you’re contributing R3,472 per month this year towards your kid’s university fund.
Assuming an inflation of six percent a year, multiply R3,472 by 1.06. This equals to R3,680, an increase of R208 per month. Therefore, you will have to contribute R3,680 to the university fund in the second year. Similarly, you will have to contribute R3,900 per month for the subsequent year (R220 multiplied by 1.06)
Source: The Ordinary Millionaire
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