This month is Financial Literacy Month, the perfect time to reflect on your financial habits and take meaningful steps towards financial wellness. Learning to handle your finances effectively begins with a commitment to change and an openness to better habits. A solid budget or spending plan is the foundation of financial success. Why? Because it tells your money where to go instead of wondering where it went. Let's break this down into steps.

The Four Key Elements of a Budget
To craft a functional and realistic spending plan, you'll need to focus on these four basic elements:

Income

Your income represents the starting point of your financial plan. It’s essential to know exactly what funds are coming into your household each month.

Gather your bank deposit statements, pay stubs, or any other forms of income records to identify your total "means." The goal here is to live within or below these means—not beyond them.

Fixed Expenses

Fixed expenses are predictable monthly costs that don’t change, such as:

  • Mortgage or rent payments
  • Car loans
  • Insurance premiums
  • Utilities
Take some time to review your payment history over the last few months. This will help you recall recurring fixed expenses to calculate an estimated total. 

Variable Expenses

Unlike fixed expenses, variable expenses fluctuate month-to-month, such as:

  • Grocery & household shopping
  • Dining out
  • Personal care items
  • Entertainment
Go through your recent bank or credit card statements to identify these expenses. Add them to your budget, ensuring you’re prepared for both fixed and flexible spending needs.

Periodic Expenses

Periodic expenses are those costs that occur less frequently, such as:

  • Annual insurance premiums
  • Holiday gifts
  • Unexpected medical
  • Car or home maintenance
To prepare for these "almost certain" expenses, calculate their estimated yearly cost and divide that total by 12. Saving this amount monthly ensures you’ll have funds ready when the time comes. For those unexpected emergencies, consider setting up a specific account also known as an "emergency fund".

 

Once you’ve categorized all your expenses and added them up, it’s time to compare your spending to your income. If you consistently spend more than you bring in, it’s time to adjust your budget. This adjustment process typically takes three to six months to perfect as you track and refine your habits. A budget will only work when consistent tracking accompanies it. Leverage budgeting apps, spreadsheets, or financial journals to monitor your income and expenses.