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Households should start off 2010 with a sensible, disciplined monthly budget.

"Less that 10 percent of consumers make the effort to draw up a detailed monthly budget for themselves and then monitor their actual spending against this budget," says Paul Slot, Director of Octogen, personal finance wellbeing and debt counselling specialists. "Some have good intentions and do this for a few months, only to then slip back into poor habits. If consumers took the time to design budgets and then track where their money is really going, they could significantly improve their spending patterns."

Slot highly recommends using the well proven '35-25-35' budget principle in order to ensure effective and wise spending of monthly income.

Three main categories of a budget

A household budget usually comprises three main categories, being household expenditure, financial services and debt repayments:

  • Household Expenditure: 35 percent of monthly income should go to this category which includes spending on domestic wages, food, communications, entertainment, security, travelling costs, water and electricity.

  • Financial Services: 25 percent of monthly income should go to long term life assurance products, short-term insurance, medical aid, pension contributions and towards longer term savings if possible.

  • Debt Repayments: 35 percent of monthly income should go to repayment of debt such as credit card, home mortgage (or rental, if the residence is not owned), car repayments, instalment sale agreements such as furniture, in-store accounts and any other monthly debt repayments.

  • Emergency savings: There should also be a five percent allocation to an emergency fund saving (click here read 'Saving for a rainy day') as opposed to traditional savings which fall into the financial services category of income spend.

Slot says this approach would mean a healthy and balanced budget for the average person and each month actual spend should be compared against these benchmarks.

Balance your budget

"In some cases it would be acceptable to exceed the norm in one or more of these categories, but this must then be matched by an equal reduction in one or more of the other categories as that is the whole point of a balanced budget.

"Older generations called this 'the envelope system'. At the beginning of the month, bread money would be placed in one envelope, and so on for all types of expenses ? and if one envelope was empty before month end, money would then have to be taken from a different envelope."

The budget must include spending on financial services as products such as insurance and medical aid are a form of risk management, protecting the family against the occurrence of certain negative events. There should also be adequate saving for retirement, which includes the employer pension fund and one's own additional savings.

Article continues on page two: Maximum montly debt repayments and a personal financial 'To Do' list...