Budgeting 101: Getting started with managing money

Budgeting 101: Getting started with managing money


How often do you look at your personal financial statements, and what is your first emotion when you look at them? Do you need to catch up on the promised step? If so, one of the first tools you will want to establish Is a budget that will help you keep track of all your income and expenses so that the small steps are needed to create momentum for achieving your long-term financial goals.


Identify your priorities in life.

Before budgeting, it is essential to look at your life in general and consider what you want to achieve for yourself and your loved ones. There is a saying that “if you fail to plan, you plan to fail, ” yet most people do not plan for what they want to achieve.


We suggest you list goals and then prioritize them in terms of time and importance. We understand that this is easier said than done, and therefore have created a free guide that will get you started in terms of identifying the goals as a first step in your journey. Once you develop a set of goals, you can create a budget to help you reach them.


What is a Budget

In its simplest form, a budget estimates income and expenses for a specific period, such as a month. Once you identify your sources of income and current monthly expenses, decide your appropriate lifestyle to be within your means.


You can jot the information down with a pen and paper, or you can use one of the many software programs designed specifically for this purpose.


Step 1: Identify your current monthly income 

The first step in budgeting is to identify all your sources of income. For most of you, salaries and wages are likely to be the dominant force of income in your life.

  • If you are a W-2 worker, review your pay stub to determine your periodic net pay.
  • If you are self-employed, track your past and projected earnings closely to determine a periodic estimate.
  • We suggest a conservative approach when deciding on your income level if you receive variable compensation like commissions and business profit distributions.

Next, identify and list any assets that create passive income for you. These can be properties that give you rental income or investment portfolios that generate dividend or interest income.


In addition to the above, look at if you have another source of income. The most common additional income sources are royalties, alimony, and child support payments.


Consolidating the above information will indicate the “amount you can afford to spend” for a month.



Step 2: List your monthly expenses 

Like your income sources, listing your expenses is the first step.


However, it is crucial to assign a few categories when it comes to expense management.


First, you should consider each expense in your spending plan and determine whether it qualifies as a need (mandatory/unavoidable), a want (subject to choice/preference), or a wish (aspirational expense – new car, bigger house). This distinction may be subjective and change over time.


Next, you need to add a second categorization to understand if the expenses are fixed or variable.


Fixed costs do not change every month and consist of expenses such as rent, mortgage payments, HOA dues, fixed-cost utilities (e.g., cable, phone, internet, waste), prescriptions, fixed-cost insurance premiums,(e.g., health, disability), lease/auto loan payments, professional dues, tuition, etc.


Variable costs change monthly and consist of household supplies, transportation, property maintenance, clothing, child care, pet care, health and wellness, personal care, dining out, social events, hobbies, etc.


You’ll also want to ensure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, etc. To ensure you remember everything, look through canceled checks, credit card bills, and other receipts from the past year.


Finally, as you list your expenses, it is essential to remember your financial goals. Treat your goals as expenses and regularly contribute toward a “Savings” or “Investment” account to help you reach your goal.


Evaluate your budget

Once the above steps are complete, you can make an initial evaluation of how you manage your money. If there is net income, you are on the right track and look at further optimizing your expenses to increase your savings and investment buckets.

If you find a situation where you spend more than your income or think you are not saving enough, the immediate step is to evaluate your current lifestyle and make some adjustments. The discretionary/Variable bucket is an excellent place to start. In the long term, you can also look at a strategy to increase your income bucket by developing yourself to get a higher-paying job or expand your business to reach your income goals.


And remember, if you find yourself short, don’t worry! All it will take is some determination and a little self-discipline, and you’ll eventually get it right.


Monitor your budget

While developing a budget is essential, it is more important to build a strategy to monitor and update it on an ongoing basis. While you do not have to be too rigid in managing expenses, it is crucial to building your financial well-being. In life, it is said that nothing is certain. So when unexpected bills come from a medical expense or a leaky roof, you will be more confident handling such events.


Tips to help you stay on track

  • Involve the partner and other household members. Agree on line items and amounts upfront and meet at least monthly to check your progress
  • Stay disciplined: budgeting is hard, and getting into financial trouble without having a budget is also hard. Choose the less stressful, hard.
  • Start your new budget and have categories that make it easy to follow up monthly so that you can stick with the plan
  • Find a budgeting system/software that fits your needs. One that integrates all bank accounts and credit cards will minimize the time needed to gather data.
  • Distinguish between expenses that are “wants” (e.g., designer shoes) and expenses that are “needs” (e.g., groceries)
  • Build rewards into your budget, a meal out with the family occasionally or a family trip every “X” months

At Capital Elements, our entry-level financial planning solution gives you a platform with certified financial planners to do comprehensive planning, including monthly budgeting, where a professional does your budget and updates you monthly. Subscribe here – “LINK”

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