Net Worth and Personal Budget
Your net worth is the balance of what you owe deducted from what you own. Make a list of your assets and what they’re worth, then another comprised of your obligations. Subtract the sum of your obligations from the total worth of your assets to get your net worth.
Draw up a personal budget by deducting your expenses from your income. If you end up with a surplus, it’s your choice whether to save, invest or spend the money. On the other hand, if your expenses exceed your income, you’ll have to find ways to either increase your income or reduce your expenses – then adjust the budget accordingly.
Regularly calculating your net worth and frequently updating your personal budget will give you an understanding of where you are and how to get where you want to be. After all, overspending and over-indebtedness are side effects of not knowing your net worth and failing to revise and follow your personal budget.
Lifestyle Inflation
In this age of materialism, as consumers earn more, they spend more. This insidious phenomenon is called lifestyle inflation. As we progress in our careers and earn better salaries, we tend to upgrade our lifestyles.
It’s easy to become accustomed to an upgraded lifestyle, but far more difficult to maintain that level of comfort. We forget, as the standard of living gets higher – so too does the cost at an unsustainable pace.
You may be able to pay your bills now, but in the long run lifestyle inflation is damaging as it prevents you from building wealth. Just remember, every rand spent today represents a rand less for retirement.
Needs and Wants
Each of us only has a finite amount of money. As such, knowing the difference between needs and wants is in everyone’s best interest. Mindful spending allows you to make meaningful buys. Naturally, needs are for survival – food, clothing, healthcare, shelter and transport.
Conversely, wants are items on a wish list – nice to have, but inessential. As a rule, you should only consider allocating some income towards your wants, once you have budgeted sufficiently for your needs. Always do this with discretion – life is unpredictable.
Savings
It may be technically true that it’s never too late to start saving for retirement. Even truer still, it’s never too soon to start saving, and the results will speak for themselves. It all comes down to the power of compounding – a marvel Albert Einstein dubbed ‘the eighth wonder of the world.
Compounding is simply the reinvestment of earnings and is, naturally, most fruitful over time. The longer the term your earnings are reinvested for, the greater the value of your investment. Strictly speaking, this translates into higher earnings.
Emergency Fund
Setting aside money for emergencies will allow you to cover unexpected expenses for medical purposes or car repairs. Say you experience a gap or drop in income, this fund will help you cover your living essentials, without having to beg, borrow or steal.
Illness and unemployment are unavoidable at times, and in South Africa’s uncertain economy, an emergency fund is a literal lifesaver. Aim to save at least three to six months’ worth of salary, though more is preferable.
Add emergency fund contributions to your personal budget as a regular expense to ensure this money isn’t spent frivolously. And be sure to rebuild the fund, if ever drained for emergency purposes.
The Bottom Line
When applied regularly and paired with a bigger picture perspective, this guide to improving your personal finances will enable you to build your personal wealth in a realistic, tangible way.