A budget is a written plan that specifies how much money you'll spend each month.

Main Points

A budget is a written plan that describes your monthly financial plans.

Budgets are used by both individuals and corporations to control their financial flow and accomplish their objectives.

A budget is crucial since it provides information on your monthly income and expenditures.

The envelope budget, the zero-based budget, the 50/30/20 budget, and the 80/20 budget are a few examples of common budget types.

Budget Definition and Examples

A budget is a tool for financial planning in which you list your income expectations and intended uses for the money you expect to earn (i.e., your expenses). Budgets are used by both individuals and corporations to monitor their financial flow and accomplish their objectives.

Other name: spending plan

The 50/30/20 budget is one well-liked approach to budgeting. 50% of your income is spent on necessities (like rent and electricity), 30% on wants (like shopping and eating out), and 20% is set aside for savings (such as an emergency fund, paying down debt, or building up your retirement fund).

How Do Budgets Operate? You can use your money to accomplish your goals by using it to track your expenditure using a budget.

Budgeting enables you to make financial decisions in advance, according to R.J. Weiss, CFP and founder of The Ways to Wealth. Everyone has unique priorities and objectives.

By creating a budget, you may ensure that your priorities and goals take precedence over less significant costs.

Following the creation of your budget, one of three things will occur:

● You'll have a balanced budget, which indicates that your income and outgoings are equal and that you aren't blowing through your resources.

● You'll be in deficit, which indicates that you're spending more than you're bringing in and may be borrowing money.

● You'll have a surplus, which indicates that your expenditures are below your income.

● You can utilize the extra cash to save, settle debt, and accomplish your objectives.

Here is a more detailed explanation of how both personal and business budgets operate:

Personal Budgeting

A personal budget is designed to assist you in spending less than you make and using the difference to fund your savings goals. In its most basic form, a personal budget functions as follows:

You produce a written budget at the start of each month, detailing how you want to spend your money.

The next step is to keep track of your expenses at the end of each day. (A budgeting tool or spreadsheet can be useful in this.)

Three types of expenses are most likely to be included in your budget:

The cost of these fixed expenses is the same each month and is usually non-negotiable. Rent or a mortgage, auto insurance, your phone bill, and several utilities are a few examples.

Variable costs: Although these costs are required, they change from month to month. Examples include the expense of food, power, travel, and car upkeep.

Discretionary costs: These are entirely optional and for fun. These can be anything from new apparel and technology to trips and entertainment expenditures.

Lastly, you evaluate your progress at the end of each month and utilize this month's spending to create the budget for the following month. Your budget is in deficit because your income is greater than your expenses. Because you couldn't make your bill payments on time, you already had a gut feeling that this was the case. But now that you have a budget, you are fully aware of your monthly spending.

You start cutting spending on takeout food, clothing, entertainment, and subscriptions because you need to free up at least $200 in your budget. These are all items you'd like to spend money on but may not be able to right now.

You reduce your takeout food budget by $50, your subscription spending by another $50, your entertainment spending by $40, and your apparel spending by 50% to make an additional $110 available.

Before you know it, your budget has $250 more to spend. You allocate $200 of it to paying your bills, and you set aside $50 to begin an emergency fund as a safety net against unforeseen costs.

Different Budgets

Budgets come in almost as many varieties as ice cream flavors. Consider experimenting with a few different budgeting approaches until you discover which "taste" you prefer.

Wallet Budget

By establishing spending caps for each of your budgeting categories, you may keep track of your spending by placing the appropriate amount of cash in a real envelope. Once you've used up one envelope, you can't use that category again until you get paid again.

50/30/20 Spending

The 50/30/20 budget rule states that you should spend 50% of your income on necessities, 30% on wants, and 20% on debt repayment and savings. Hence, if your monthly take-home salary is $5,000, you would spend:

housing, transportation, and other essentials totalling $2,500 (50%) Spending $1,500 on enjoyable activities like eating out, shopping, and subscriptions (30%) $1,000 to complete debt repayment and meet your savings targets (20%)

80/20 Plan

If you don't like the thought of having to choose between "needs" and "wants," think about using the 80/20 rule. According to this budgeting principle, you save 20% of your income and spend the remaining 80% as you see fit.

Remember that the 20% savings rate is only a suggestion. Whatever works best for you can be changed to a 70/30 budget or a 60/40 budget. The "pay yourself first" budget or the "reverse budget" are other names for this strategy.

Budget Based on Zero

A zero-based budget is a method in which you allocate every dollar so that your revenue less your outgoings equal to zero. Not that you spend every dollar you have. Instead, you allocate every penny of your income to your bills, debt repayment, and financial objectives, leaving nothing over.

Should I Make a Budget?

Yes. A budget is crucial because it enables you to save money for the future and make on-time payments on your debts. In order to have more money to devote toward your goals, like saving for retirement, a trip, a house, or a new automobile, it also assists you in finding ways to spend less money on things you don't value.

No matter how much or how little money you make, everyone may benefit from having a budget. Without one, it can be challenging to track your monthly spending.

Note

Use a budgeting tool if manually making a budget each month sounds time-consuming. These applications lighten your workload by automatically importing and classifying transactions while syncing to your financial accounts.

Setting Up a Budget

Here is how you might go about making a budget, whether for personal or business use:

1Total Up Your Monthly Earnings

Finding out how much money you make each month should be your first priority. For this stage, use your "net take-home pay," which is the amount of money you receive after taxes and other withholding.

If you receive a salary, you can check your pay-stubs to determine your net take-home pay. If your income is inconsistent, add up all of your earnings from the previous year and divide them by 12. You will then have a working estimate.

Include all additional income sources, such as Social Security, child support, side jobs, and more.

Note Do you need a free budgeting template? The Consumer Financial Protection Bureau provides a straightforward yet useful template.

2Calculate Your Monthly Spending

It's time to estimate your expenses now. Examine previous bank and credit card statements to determine your monthly spending. You should include the following typical costs in your budget:

● Mortgage or rent payments

● Utilities (gas, water, electricity, sewage) (gas, water, electricity, sewage)

● Cable and the internet

● Cost of a cell phone

● Food delivery and groceries

● Health care costs

● Travel expenses

● Costs of childcare and education

● Pet fees

● Payment of debt

Weiss advised those who are just beginning to budget to focus on only one category of expenses for the upcoming month. "Choose an area where you frequently overspend, such as eating out, groceries, or entertainment, for optimum results.”

The goal is to begin modestly in order to increase your chances of success. From there, you'll develop your budgeting skills and acquire confidence so that you may use them in other areas.

Note

Budgeting for seasonal expenses is important. Make sure to include a "Holiday costs" section in your budget for the months of August through December if you want to save money for holiday spending.

You'll have enough time to save up the money you need for gifts, celebrations, and other costs if you do this.

3Calculate your income by deducting your expenses

You'll have a better understanding of whether you're living within your means or taking on additional debt once you deduct your spending from your income.

If your income exceeds your outgoings, you have extra cash to save or spend.

Consider allocating a portion of this cash to the financial objectives you established in Step 4.

If you made a profit, you are barely maintaining your standard of living. You should ideally have some spare cash each month to invest toward your financial objectives. Check your spending to see if you can cut a few to give yourself a cushion each month.

You are spending more than you are earning if your expenses exceed your income. Find ways to reduce spending or boost your income.

4Include some monetary objectives in your budget

Include some financial objectives you'd like to achieve in the upcoming months or years when you create your budget. You could, for instance, establish budget categories for the following objectives:

● A reserve account ● House down payment ● A new apartment's security deposit ● Brand-new automobile ● Vacation ● Children's college fund ● Additional payments for debt

5Make modifications along the way

Your budget should reflect how dynamic and ever-changing your life is. Make sure your budget is updated to account for changes when you gain a new job, incur a new expense, or receive a bonus.

Track your spending as the month goes on and make necessary adjustments. You might want to transfer funds from another expenditure category to make up the difference if you routinely go over budget in one area.

Budgeting cannot be done with just one method, according to Weiss. It's critical to enter the process knowing that budgeting is a skill that requires practice.

You'll probably fail in the first month, but what matters is that you use what you've learned moving forward.