Budgeting

Budgeting is a simplified way of writing down what you estimate within a specific period to receive as income, and what you estimate to spend. Your ability to draw-up such an estimate, and practically apply to your circumstances is important for one’s financial well-being. The objective is to give one a better understanding of their financial position in terms of knowing what to spend on and when to spend the money in line with one’s income.

Income:

For an employed person, estimating income can be easy, you know how much you earn on a weekly, fortnightly or monthly basis. This also gives one certainty in that they know exactly how much they will have at a given time of the month. This is however not the case for someone who is self-employed as they may require serious thinking about their income since it is not guaranteed. Historic information stating how much you would have earned in the past can assist you in budgeting for the future.

Expenditure (Spend):

What we spend our money on, that is food, clothing, shelter etc. These can be a lengthy list which can exceed our income. Drawing up a budget or a list of items to spend on can be extremely helpful in curbing spending money that you do not have. Prioritising items we need in our list is therefore important while those items that may not be that important can occupy the bottom of the list, or a wish-list.

Prioritising when budgeting

In most cases, income is a very much limited resource, while expenses can fill up as many pages of paper. However, our expenses based on our needs may be unlimited. A carefully drafted budget can help one prioritise their expenses and consider what needs to be paid as a "need", and what goes into "wants". Our ability to prioritise place us in a good position to know what our “needs and wants” are.

Simply put, these are as follows:

  • Need: Basic essential one must-have.
  • Want: Something you would like to have (Often something one can live without).

Example of needs: Food, Transport, Electricity, Water, Shelter, Clothes, Keeping warm during winter, School fees

Example of wants: Nike training shoes, Owning and driving a BMW, Wearing designer jewellery, Owning a house in Bryanston

It must be noted that some needs may require us to acquire assets. Assets such as a house have become a basic need. The same may be true for purchasing a car that one desperately needs to get to work or to perform some form of activities that may be a source of income for them. We, therefore, need to be informed of our choices and what to expect should we sign on the dotted line.

Decision Making Process

We will use an example of purchasing a vehicle to illustrate financial decision making and budgeting.

Majority of individuals follow this process when purchasing a vehicle.

  • Realise the need to buy a vehicle.
  • Determine how much you can afford to pay for the vehicle.
  • Visit dealerships to look for prices and specification of the vehicle.
  • Decide on the vehicle you like and how much it will cost, including insurance costs.
  • Establish if it does have a maintenance plan.
  • Apply for financing.
  • Finance is approved.
  • Sign all papers to purchase the vehicle.
  • Furnish the financing company with your signed motor insurance documentation.
  • Take delivery of the car.

Down-sides of this financial decision-making process.

  • The initial focus is on vehicle repayment only.
  • Insurance becomes an after-thought.
  • The costs associated with running the vehicle e.g. fuel and other consumables are an after-thought.
  • The costs associated with maintenance of the car should the motor-plan elapse are not considered.
  • We tend to take the cheapest of the insurance that does not fully cover our situation leading to unintended financial exposure.

Being financially savvy when transacting with Insurance Products

The Financially Savvy process requires that we do the following:

  • Realise the need to buy a vehicle.
  • Work on a budget for the vehicle (what can you afford).
  • Visit dealerships to look for prices and specification of the vehicle.
  • Have a shortlist of vehicles based on the budget and consider the following:
    • Cost of maintenance.
    • Does the vehicle come with a maintenance plan?
    • What warranties and guarantees does the vehicle come with?
    • Period of these warranties and guarantees.
  • Check with the different banks on who can finance you. 
    • Compare the different rates and conditions that the bank offers you.
    • Get bank pre-approval.
  • Get information on costs associated with the vehicle:
    • Maintenance costs/ maintenance policy.
    • Petrol consumption.
    • Insurance for the vehicle.
  • Get quotations for the models you have shortlisted.
    • Consider excesses and additional excesses.
    • Note exclusion and condition on the policy.
  • Draw up budget including all costs of purchasing the vehicle.
  • Make a decision on the vehicle that is affordable and meet your needs.
    • Get bank pre-approval on the vehicle of your choice.
    • Select the insurance cover that is suitable for you.
  • Visit the dealer to buy the vehicle of your choice.
  • Submit financing papers to the bank.
  • Once vehicle is approved by bank, activate your insurance cover you selected.

By following the Financially Savvy Process, you can acquire assets that are within your budget and can afford. You can also plan appropriately and ensure that we are financially stable.

Unplanned Events/Expenditure

The truth about this is that we cannot predict everything, there will always be events that are unplanned that may impact on our financial wellbeing and budget. When focusing on our vehicle example, these include:

  • Vehicle accident which requires that you pay an excess.
  • Vehicle breakdown after the warranty has expired.
  • Alternative transport whilst vehicle is unavailable due to the above.
  • Where possible by additional insurance for such events.


As the above may or may not happen, however, it is important when you are financially savvy, we need to include them in our budget as unforeseen expenses.

The same process outlined above for buying a vehicle can be utilized when purchasing any other items. This will ensure that we are Financially Savvy when transacting with non-life insurance products.