How to adjust your budget to avoid debt

The rising cost of living, interest rates, and inflation mean debt is unavoidable for most of us. However, budgeting smartly can help you ensure that debt has a minimal impact on your finances.

We explore the value of creating a budget and revisiting it regularly to reduce your debt reliance.

Tip: Struggling with debt? Consider applying for debt consolidation.

Can you avoid debt by budgeting?

It’s not easy to avoid debt, but it can be done, says Farzana Botha, segment solutions manager at Sanlam Risk and Savings.

“If you try to live within your means as much as possible, you can implement measures to achieve this goal,” she says.

Start by understanding where your money goes each month. What are your fixed costs? What do you spend on groceries, petrol, and entertainment? How much tax are you liable for and how much interest do you pay to service debt?

Once you understand your true financial position, you can set goals and adjust your budget accordingly, says Dhashni Naidoo, FNB’s consumer education programme manager.

“Once you’ve drawn up a budget, revisit it often, and write down clear, practical plans to allocate your income in a way that either reduces current debt or avoids taking on more,” she says.

Track your spending by keeping receipts and reviewing bank statements, and adjust your budget to take inflation and interest rates into account.

Get to grips with budgeting basics

Here are some basic budgeting tips to help you manage your money.

1. Pay yourself first

This is the golden rule of budgeting; yet we often neglect our savings goals, in order to free up additional cash.

“Save as soon as you get paid. This habit helps you to avoid overspending and neglecting to set aside cash for a rainy day or other goals,” says Botha.

Naidoo says automating your savings via a stop order will help you build a financial buffer without having to think about it.

2. Start an emergency fund

This is a vital way to stay out of debt, as it gives you an alternative to expensive credit card swipes or personal loan debt in the event of a crisis.

Three to six months’ worth of expenses is the rule of thumb when saving for an emergency fund, and while this can be difficult on a tight budget, Naidoo recommends planning to save over an extended period.

“If your expenses are R5,000 a month, and you save R625 a month for 24 months, you’ll arrive at the desired amount of R15,000,” she notes.

Botha says your emergency fund should take the form of a savings account that allows you to earn interest while invested, but allows easy, penalty-free access if you need the money for an unforeseen event.

3. Pay off existing debt

Debt costs money. If, for example, you take out a R20,000 loan from a credit provider, and agree to pay it back over 36 months at an interest rate of 21%, you’ll need to pay back R867.99 a month.

This doesn’t take into account a once-off initiation fee of R150, a monthly service fee of R50, and credit protection insurance at R50 a month, for example.

“The total you could pay on a R20,000 loan would be R12,513.78 (R8,763.78 interest, plus the abovementioned fees) plus the loan amount, which amounts to R32,513.78. Imagine what you could have done with the R12,513.78,” Naidoo says.

Tips to help with budgeting                                           

• Change your mindset. “Instead of thinking about budgeting as a chore, think about it as that exciting time of the month when you get to tell your money what to do,” Naidoo recommends.
• Avoid lifestyle inflation. Avoid the tendency to increase your spending as your income increases.
• Don’t budget alone. Get everyone in the family involved, says Naidoo. “This will ensure that everyone knows their spending limits. However, it’s important to make budgeting fun so nobody feels deprived.”
• “Gamify” your experience. Botha recommends challenging yourself to find better deals. “Take advantage of sales, discounts, coupons, and membership rewards so you can have what you want, but for free or at a lower price,” she says.
• Don’t forego enjoyment. A common misconception about budgeting is that fiscal discipline means giving up outings, hobbies, or vacations. “You don’t have to give them up – just plan and save for them,” Botha points out.

Tip: Paying yourself first is a principle that allows you to prioritise savings in your budget. Explore savings options that can work for you.