What is a budget?
A budget is a financial plan for income and expenses. It is effectively a plan of how you expect to earn and spend over a specific period of time. It helps you manage your finances by assigning a role for your money beforehand. This way, you’re less likely to spend it in unexpected ways.
Budgets can be tailored for individuals or groups - e.g. budgeting can be done for couples or families. They can also be tailored for specific events - e.g. weekend budget, or holiday budget, or even for specific items - e.g. budgeting for a new car, or television. There’s no one-size-fits-all to budgeting. You can go into as much or as little detail as you prefer.
Some people prefer traditional budgeting - pen and paper - because of its flexibility, while others prefer spreadsheets for its customizability. The secret is finding a system that works best for you.
That said, one of the most popular budgeting techniques is 50/30/20 budgeting. It suggests you should spend 50% of your monthly income on needs, 30% on wants and 20% on savings and debt.
Why create a budget?
Budgeting is all about taking control of your money. It’s so common to use money impulsively that budgeting for future expenses might feel like depriving yourself, but that’s the wrong mindset to be in.
Just as a chef requires a recipe to create a delicious meal, an artist needs a canvas to bring their vision to life, a gardener needs a layout to cultivate a thriving garden, and you need a budgeting plan to effectively manage your finances. Budgeting provides structure, ensuring you direct your money toward your goals instead of letting it slip away unnoticed.
In truth, budgeting is often uncomfortable, and it’s easy to feel overwhelmed, to the point of feeling like you’re punishing yourself. However, budgeting is as much a punishment as exercising or eating healthy. It’s a tool for building self-control, and strengthening your financial muscle.
A different way to approach it is this - a budget can be as rigid or flexible as you want it to be, as long as you’re keeping close to your goals. It’s okay to change it as your circumstances change.
In fact, it should change as your circumstances change — when you get a raise, for example, or become a homeowner. Budgets can be reviewed and updated periodically. Some people choose to do this monthly, bi-monthly or twice a year, depending on life changes that occur. The idea is to make your budget as personalized as possible, leaving room to adapt. Surprises (and mistakes) will happen.
Why is budgeting important?
Budgeting is an important tool for directing your money where you want it to go. It’s not just for people in a bad financial situation. It helps you see where your money is going, and identify what expenses are soaking up your cash.
The importance of a budget can be summed up as so:
- Gain Insight into Your Financial Habits - Monitoring your income and expenses provides a transparent view of your available savings and spending capacity. By recognizing spending patterns, you can pinpoint areas for improvement. Perhaps you’re already living within your means—great job!
- Plan for the Future - An effective budget encourages you to allocate funds for an emergency fund and savings goals, such as vacations or retirement. Here’s how to determine how much you should save each month.
- Manage or Eliminate Debt - Outlining your expenses ahead of time minimizes the chances of overspending and can aid in paying off any existing debt.
- Reduce Financial Stress- While budgeting isn’t a complete solution, it can assist you in making informed financial decisions and preparing for potential challenges.
How Do You Start a Budget?
Ready to dive into budgeting? Here’s how to get started with the fundamentals:
- Identify Your Income: Begin by outlining all sources of income entering your household. This includes salaries, tips, Social Security payments, and any other forms of revenue.
- Monitor Your Expenses: Choose a specific timeframe, such as a month, and list all your expenditures during that period to see where your money goes.
- Assess Account Balances and Debts: Take stock of your current bank account balances and any outstanding debts, including loans like a car loan or mortgage.