What is a budget?

Definition and Examples of Budgeting

A budget is a written plan that outlines how you will spend your money each month. Both individuals and businesses use budgets to manage cash flow and achieve their goals. A budget is important because it shows you how much money you have coming in each month and how that money is being spent. Some popular types of budgets include the 50/30/20 budget, the 80/20 budget, the envelope budget, and zero-based budgeting.

How Does Budgeting Work?

The purpose of budgeting is to help you track your expenses so that you can use your money to achieve your goals. “A budget helps you determine how to spend your money ahead of time,” according to R.J. Weiss, CFP and founder of The Ways to Wealth. “Everyone has different priorities and goals. By budgeting, you ensure that your priorities and goals take precedence over expenditures that aren’t as important.” After setting up a budget, one of three things will happen:

• Balanced budget: This means your income equals your expenses, and you’re not spending more than you earn.
• Deficit: This means you’re spending more than you earn and may go into debt.
• Surplus: This means you’re spending less than you earn. You can use the extra money to save, pay down debt, and achieve your goals.

Types of Budgets

There are many types of budgets, just like ice cream flavors. Consider trying out some different types of budgets until you find the “flavor” that suits you best.

• Envelope budget: The envelope budgeting method involves setting spending limits for each category in your budget and placing that amount of cash in a physical envelope to help track spending. Once you exhaust the envelope’s amount, that category is unavailable until you receive your income again.
• 50/30/20 budget: According to the 50/30/20 budgeting rule, you spend 50% of your income on needs, 30% on wants, and 20% on savings and debt repayment. For example, if your net monthly pay is $5,000, you would spend $2,500 on essential needs (50%), $1,500 on fun things like dining out, shopping, and subscriptions (30%), and $1,000 for debt repayment and achieving savings goals (20%).
• 80/20 budget: If you don’t like the idea of categorizing what is a “need” versus a “want,” consider the 80/20 method. With this budget rule, you can save 20% of your income and use the other 80% however you wish.
• Zero-based budgeting: Zero-based budgeting is a strategy that allocates every dollar a job, so your income minus your expenses equals zero. You don’t necessarily have to spend every penny you have. Instead, you manage your expenses, debt repayment, and financial goals so that nothing remains.

Do I Need a Budget?

Yes. Budgets are essential because they help you pay your bills on time and save for the future. They also help you find ways to spend less on things you don’t consider valuable so that you have more money to put toward achieving your goals, such as saving for retirement, a vacation, a new home, or a new car.

Everyone can benefit from a budget, regardless of income size. Without a budget, it’s hard to know how to allocate your money each month.

How to Create a Budget

Whether for personal use or business use, here are the steps you can follow to create a budget:

1. Gather your monthly income: First and foremost, you need to know how much money you earn each month. Use the net income amount you receive after taxes and deductions for this step.
2. Estimate your monthly expenses: Now it’s time to calculate your spending. Review your bank statements and old credit card bills to see how much money you spend each month. Some common expenses to add to your budget include rent or mortgage payments, utility bills, internet and cable, mobile phone bill, groceries, takeout food, cosmetics, entertainment, subscriptions, miscellaneous expenses, and debt repayment.
3. Subtract

Expenses from Income: Once you subtract expenses from income, you’ll get a better idea of whether you’re living within your means or accruing additional debt. If your income is higher than your expenses: you have more money that you can save or spend. As a result, you can allocate some of this money to achieve the financial goals you set in step 4. If you are on the edge of balance: you are living within your means, but barely. Ideally, you want some extra money left over each month to put toward your financial goals. Check if there are some expenses you can cut back on to give yourself extra time to work with each month. – If your expenses are higher than your income: you are spending more than you earn. Look for ways to reduce expenses or increase your income.

4. Setting Financial Goals in Your Budget: When building your budget, add some financial goals you wish to achieve in the coming months or years. For example, you can create budget categories for goals such as building an emergency fund, a down payment on a house, a security deposit on a new apartment or car, a vacation, a children’s education fund, or extra debt repayment.
5. Making Adjustments While Using the Budget: Your life is dynamic and constantly changing, so your budget should be as well. When you get a new job, add a new expense, or receive a bonus, adjust your budget to reflect the changes. As you move through the month, track your spending and make adjustments as needed. If you’re consistently overspending in one budget category, you may want to move money from another spending category to cover the difference. “There is no perfect way to budget,” according to Weiss. “It’s important to anticipate that budgeting is a skill you need to practice. You might experience failure in the first month, but the key is to learn from what you did and apply it moving forward.”

Source: https://www.thebalancemoney.com/what-is-a-budget-5215537