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The beginner's guide to managing money

Get the finance tips you need and more with our beginner's guide to money management.

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Money Matters
May 4, 2022

Navigating your finances without a plan is just like going on a road trip without a GPS. We all know how hard it can be to determine what your financial future will look like but there are steps you can take to gain more confidence in your financial security.

This complete guide will give you tools you can use for budgeting and managing your money. Personal finance can be a lot to think about all at once. There are a lot of different factors that will go into managing your money in a good way. You have to be thinking about your after-tax income, spending money, savings goals, retirement, and life in general. We don't want you to feel overwhelmed so we have broken down the different parts of personal finance to give a clearer path on managing your money. So take a deep breath and continue reading.

How do I manage my money?

How can you manage your money effectively? First you have to be genuinely honest. You should take an assessment of everything you have incoming and outgoing. You probably have fixed expenses that you spend money on monthly. On top of that, you probably have moments where unexpected expenses arise and you have to have enough money to cover them.

Once you know what your current financial situation is, you can start making financial goals. From there, you can develop a detailed action plan, apply changes, and learn where your dollars are actually going.

Long term and short term goals

A big part of determining how to manage your money is figuring out if there are certain goals you want to reach. Setting goals can be a great start when trying to determine the best way to manage your money. There are two types of goals you can set; long term and short term. 

A short term goal is something you can accomplish within 3 months to 2 years. Here are a few examples of a few short term financial goals you could set: 

  • Travel
  • Home improvements
  • Emergency fund
  • Paying off debt
  • Down payment on a house or new car

A long term goal is something you hope to accomplish within 3 to 5 years or even longer into the future. Here are a few long term financial goals you could set: 

  • Retirement 
  • College fund 
  • Paying off your mortgage
  • Start a business

Goals are checkpoints you can use in your personal finance journey to make sure you are on the right path. Once you set a few long term and short term goals you can now start to think more in depth about your budget and what that will actually look like for you. 

What is budgeting?

Put simply, budgeting is the process of tracking how much money you are spending. A budget will show you a summary of your income compared to your expenses. Budgets provide an estimate of revenue or expenses for an upcoming period that is typically created and periodically reviewed. Budgeting can take place for individuals, groups, businesses, or governments.

So, how do you get started? The first step is to take a closer look at your personal finances. Try asking yourself a few of these guiding questions in order to truly understand where you are financially: 

  1. What do you spend most of your money on? 
  2. Are there expenses or items you could use less money on? 
  3. Are there expenses or items you want to use more money more on? 
  4. Do you make impulse purchases? 
  5. Do you have a loan you want to pay off?
  6. Have you set short or long term goals?

These questions are a great starting positions and answering them will give you a clearer view on how to exactly start putting your budget together. Once you create a budget you you can track and manage money easily.

Budgeting methods 

A popular and easy to use budgeting method is the 50/30/20 rule. If you use this method you will spend around 50% of your money after income taxes on your needs, 30% will go towards your wants, and the remaining 20% into your savings account(s).

The 50/30/20 rule can be a less intimidating way to organize your expenses. This method breaks down your expenses into 3 categories that you can easily digest and you won't feel overwhelmed. Unfortunately, the larger categories are just the beginning. In order to personalize your budget you will need to look at the subcategories under each larger category.

A popular and easy to use budgeting method is the 50/30/20 rule. If you use this method you will spend around 50% of your money after income taxes on your needs, 30% will go towards your wants, and the remaining 20% into your savings account(s).

This is where budgeting can get tricky. You need to determine the exact sub categories to include in your personal budget. Let’s breakdown some of the subcategories under each of the larger categories you could include in your budget: 

Needs: 

The largest category in your budget should be your needs. This category will include all of the fixed expenses you use your money on. The “needs” in your budget are the things you must spend money on to live and function. 

  • Housing: If you are renting, leasing, or have purchased a home you will probably have to make a monthly payment. But housing costs don’t stop there. In this subcategory you should also include utilities, property taxes, and insurance.   
  • Food: We all obviously need food to survive so in this subcategory you can assign an amount to how much you spend on groceries. You can also include eating out in this category if you consider that a need in your personal budget. Some consider eating out a need and not a want, so you can also add it to that part of your budget if it makes more sense.
  • Transportation: How you get around is also an important part of your budget. You should account for a car payment, gas, and potentially repairs.

Wants: 

Wants are the things that you like to use money on to make your life easier or more comfortable. 

  • Entertainment: No matter what your interests or hobbies are you will more than likely want to use your money on them. You can use this chunk of your budget for leisure activities that you like. Entertainment can be things such as concerts, eating out, or even going to see a movie.   
  • Travel: If you like to travel knowing how much you have available to spend on it can help you determine how much you spend in other categories. 

Savings: 

It is often said you should pay yourself first. Putting some money aside for yourself can help you reach some of the long or short term financial goals we mentioned earlier. There are also few different types of savings accounts you could have: 

  • College Fund: If you have children or want to further your own education it may be beneficial to start a college fund and save for the future. 
  • Emergency Savings: Emergencies can also happen when you least expect them, so having an emergency savings account can help cover an unexpected expense. 
  • Retirement: It’s never too early to start saving for retirement. If you wait to start working towards that goal then your contribution is more likely to keep you back on track. There is not a specific set amount you should save for retirement, but a good rule would be to increase your contribution as your salary goes up over time.

How to budget? 

Now that you know what budgeting is and have a method you can use, it’s time to put a plan in action. According to the 2021 Schwab Modern Wealth Survey, 54% of Americans who have a financial plan feel “very confident” about reaching their financial goals, while only 18% of those without a plan feel the same level of certainty.

Having a visual financial plan can make budgeting easier because you can actually see the amounts you have incoming and outgoing. It is also a great step towards taking control of your financial situation. You can make your own budget spreadsheet/document that could look a little like this:

Monthly Income: $3,500

Monthly Expenses:

Amount:

Rent/Mortgage Payment:

$1500

Utilities:

$200

Transportation:

$300

Food:

$400

Leisure:

$300

Savings:

$500

Total Amount of Expenses: $3,200

Tip: In the example budget above you might have noticed there is an extra $200 left after monthly expenses. What could you do with the extra money?  It never hurts to put any extra money you have into one of your savings accounts.  

This basic budget is a quick way to assess how much you are spending monthly. If you don’t want to do it yourself there are online templates and apps you can download that will create a monthly budget for you and track your spending. Some of these apps will even send you alerts to keep your budget and spending front of mind. 

Factors to consider when managing money

Earnings, cost of living, and inflation

The average salary and wages in our current economic climate are insufficient to cover all of the rising prices in the market. Inflation also affects our currency, and it's very hard if we try to balance inflation. Depending on what your job is, adjusting for inflation may not immediately occur so this is when having a good budget can keep you in a great position.

Paying off loans and credit card debts

If you have credit card debt or loans, it is normally advisable to pay off any debt as fast as you can. You have to pay the minimum amount for the monthly repayment so it is important to include it in your budget. 

Money management tips & tricks

Budgeting is just one piece of the pie when it comes to overall money management. Making good spending decisions and having good spending habits will benefit you in the long run. No matter how much of your income you have, you control your finances. Financial habits include planning how the debt can be paid off, setting aside cash in advance, investing for the future and providing yourself with enough protection against life emergencies.

Control impulse spending:

An impulse purchase is anything you buy without planning to. You can help keep your budget on the right track by taking a second to stop, and think before you buy. It may be tempting to spend money randomly on an item you come across but make sure to consider your budget before you do. 

Be realistic:

It is important to make goals that aren’t impossible to reach. It could be useful to start with smaller goals and then work your way up to your larger financial goals. You should also be realistic with your budget expectations. Saving money is important for financial security but you also want to enjoy the money you worked hard to earn. One budgeting exercise you can do today is to reward yourself with a leisure allowance. For example, you could give yourself an allowance of $100 to use however you would like on a day out shopping.  

Save, save, save:

Saving is one way you can give yourself automatic financial protection. Having multiple savings accounts is way to save for specific goals. A retirement savings will help you have enough money and create a financial cushion you can rely on in the future.

Make adjustments:

You won't be able to keep the same budget because you never know what your financial future holds. You never know when inflation can occur so there is always a chance your living expenses could go up.

Consider investing:

Putting money towards shares or properties that can potentially yield a profit is an easy way to make extra money. Some consider investing easy money because individual investors use their money and get to sit back and watch it come back to them. You have to be careful with investments because you never know if you will for sure make a profit.

Conclusion

Almost everything we do in life has a financial component. Even when we participate in an activity that costs little—enjoying a walk or taking part in a Saturday school—we must have financial security.

Financial security can be difficult and requires skilled maps and GPS programs. Tell yourself how much to do to find your way. As if this wasn't an easy task, you'd be tasked with finding an efficient and safe route. Breathe deeply. Please relax. Start with this guide to managing your money and from there you can work towards your new bright financial future.

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