It’s amazing how much peace of mind you can get by simply having a bit of breathing space in your budget. A buffer budget so to speak. This is different to an Emergency Fund or special savings that you have. This is simply having a little extra left for “just in case”.
Listen to me chat on Cape Talk radio about having a buffer budget.
It may sound crazy or even impossible to save money, have an emergency fund and yet still have some extra money that’s not allocated to anything specific. You certainly can’t just fix your finances overnight but there are some steps to take to improve things.
The first important thing to note is that it’s almost impossible to create an extra buffer in your budget while you’re juggling creditors (you’re using debt to pay other debt). So, if that’s your current situation then start by looking at some of my posts on getting rid of debt.
If your debt is manageable though and you’re not in a situation of borrowing money from this person to pay that one and paying your overdraft only to transfer it out the next day, then you should read on.
Fix your cash flow
The problem with debt is that you end up using your current months income to pay for things bought in the past. And once you’ve paid your debt you often don’t have much (if anything) left to live off for the current month. This is all back to front really. Have a look at what cash flow is and why it’s so important to get this right in your budget.
Imagine not having any debt and having money saved for next months expenses. So instead of using your current salary to pay past debts imagine using it to pay towards next months groceries. What that mans is that when next month comes, you already have some money allocated to groceries and you’ll inevitably have some spare cash at the end of that month. You’ll have a budget buffer.
This spare cash can then again be “paid forward” to the following months budget or it can go towards something special.
Where to start
The simplest way to build a budget buffer is to use an old-fashioned piggy bank and literally save some coins and possibly some notes towards next month. You could also look at creating a savings account, but make sure it’s not going to cost you money! You shouldn’t over extend yourself though as you must still manage all your commitments. No use in giving yourself a false sense of achievement.
It’s also important not to be creating new debt. It doesn’t make sense to “save” R250 and yet you spend an extra R500 on your credit card. Think about it like this, your R250 that you save will likely earn 5% interest at the bank which equates to R1.04 for the month (and zero interest if it’s saved as cash). Your R500 debt is probably charged at 24% interest though and will cost an extra R10 for the month. These figures seem small because I’m using small amounts as examples but it costs you money to have debt so it’s pointless saving money when you’re also racking up debt.
So maybe you should start by simply creating less debt this month. This means that your repayment will be slightly less next month and you’ll have a little extra. That in turn means you can buy more stuff with cash and create less (or no) debt the next month and that means smaller repayments and so the cycle goes.
To sum up all the ramblings above:-
- Don’t make any new debt. If you really cannot survive the month, make as little debt as possible!
- Use cash as far as possible
- Cut down wherever you can
These may sound drastic but if you just do it for a month or two you’ll notice a huge difference!
How the buffer budget works going forward
The idea is to get to a point where you literally have spare cash lying around that is unallocated. This buffer budget could create a temptation for you to spend it but I think that if you’ve put in the hard work needed to build up this buffer then will most probably have mastered the discipline needed to manage it wisely.
The purpose of this money is simply to make life less stressful. Instead of living pay check to pay check and barely surviving the month; you now have breathing room that allows you to overspend here or there. It also allows you to make spur of the moment decisions.
Just have R200 extra next month it means that you don’t have to stress if you overspend a little somewhere. You obviously still want to stick to your budget but this just gives you room for “real life” when things don’t work out as planned. Imagine then if you could build your buffer to say R400 or R500 the next month, and a little more after that.
You really need to live within your means as this will give you great freedom and peace of mind.
How much cash buffer should I have
This buffer budget that we’ve discussed should not be confused with an Emergency Fund. As far as a buffer in your budget goes, you just need a few hundred Rands for unallocated expenses or things that you forgot to budget for. An emergency fund however is your real savings account for emergencies and that needs to be a few thousand Rands usually. Have a look at how to build an emergency fund.
Nothing earth-shattering, just plain old common sense.