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When one considers taking a loan for any purpose, it is important to first consider the ability to repay that loan on a regular basis without comprising other family or household financial obligations.

A household must also at all times make provision for emergency expenses (such as doctor’s bills) and this emphasises that a portion of family income must be saved.

There are two important parts of a budget, and these are:

  • Monthly income or your take home pay; and
  • Monthly expenses

If your monthly income is more than your total monthly expense, it means you are living within your means. But then again, you have to save for the rainy days such as emergencies. This situation is a desirable one for any household. If such a family needs to borrow money for any important household need such as extending a house, depending on certain conditions, it may be easier to obtain a loan.

If, however, a household or person’s total monthly expenses are more than the monthly income (take-home pay), then a household or person in this situation is living beyond its or his means. This is an undesirable situation. A household in this case cannot save for emergencies nor can they afford to make repayments on a new loan.

Most households or persons, especially at low-income levels, battle to understand the need to do a monthly budget and stick to it. In most instances, people have not been exposed to a process of drafting a budget. In this section, we intend to help you to compile a basic family or personal budget. The objective is to ensure that you know exactly where your income goes and how to prioritise your expenditure.

Steps in drawing up a budget

The Financial Services Board has a financial guide booklet entitled “Use Your Money Wisely”. This booklet gives guidance in compiling a personal or family budget. The following steps are adapted from this publication.

Step 1: Listing of fixed costs

The first step in compiling a budget is to make a list of all fixed costs/expenses. Fixed costs are those that a person or household has to pay on a regular basis such as monthly, and they are usually the same every month.

Illustration: Table 1

Fixed Costs**:   Your Fixed Costs:  
Rent R600    
Insurance R100    
School Fees R300    
Car Repayment R400    
Total Fixed Costs: R1 400    

Step 2: Listing variable/changing*** costs:

Write down all variable or changing costs. Although also occurring monthly, variable costs change from month to month. Examples of variable costs are electricity, groceries, account payments and so on. Remember that there are unexpected expenses and you need to provide for these by including the amount called “other”. Add the amounts and write down total.

Illustration: Table 2

Changing Costs:   Your Changing Costs:  
Electricity/Water R280    
Accounts R150    
Groceries R500    
Telephone R120    
Petrol/Repairs R150    
Entertainment R100    
Medicine R150    
Other R200    
Total Changing Costs: R1 650    

Step 3: Add total costs

Now that you have fixed costs and variable costs, add the two to get total costs and write down the answer (Our example is R1 400 + R1 650 = R3 050).

Step 4: Write down total income

Write down a list of your total income for the month (R3 500 in our example). This is the amount you have to spend each month and it is an after-tax income.

Step 5: Determining whether you spend more or less than you earn

Finally, you must subtract the smaller amount from the bigger amount. If costs are bigger, you have spent more money than you have. This is an undesirable situation for any family under normal circumstances. If your income is bigger, you have money over – that is, you spend less than you have and you still have more left which could be saved (R450 in our example). Normally, the good idea would be to budget the amount to be saved on a regular basis.

Expected additional costs/future “contingency” liabilities

The Zwane Family Budget:   Your changing costs:  
Fixed Costs:      
Rent R600    
Insurance R100    
School Fees R300    
Total Fixed Costs: R1400    
Changing Costs:      
Electricity/Water R280    
Accounts R150    
Groceries R500    
Telephone R120    
Petrol/Repairs R150    
Entertainment R100    
Medicine R150    
Other R200    
Total Changing Costs: R1 650    
Total Costs: R3 050    
Total Income R3 500    
Money Over****: R450    

Before any long-term debts are incurred, the household should consider any future liabilities that may otherwise be ignored such as:

  • The family may be expecting another baby soon.
  • A child may be going to tertiary the following year.

While the Zwane family has a monthly surplus of R450, which it may be tempted to use to repay the loan, the family will have difficulties repaying such a loan if one of the “incidences” mentioned above occurs too soon. These are some of the considerations that each household or a borrower must think about when applying for a loan to avoid financial trouble.

* Budget: a financial plan showing income and expenses either for an individual or a household on a monthly basis or /and on yearly basis

** Fixed costs: costs that are paid on regular basis and normally do not change

*** Variable/changing costs: costs that have to be paid monthly and the amount may change from month to month

**** Money over: the amount of money that is left for an individual or household from income after paying for all expenses (total cost)