A budget forecasts and monitors income and expenses over a specific period of time. Businesses and governments use budgets to track income and outgoings, but you may be most familiar with a budget as a tool for managing your money. — Worldculturepost
Different kinds of budget systems and methods are available. If you're curious about how to begin a budget or why it is important, this guide can assist you.
Key Points
- A budget is a plan for managing income and expenses over a fixed time span.
- There are different kinds of budgets you can apply to manage your money.
- Budgets can help you monitor spending and live within your budget.
- When creating a budget, pick a budgeting method or system that suits you best.
 |
| Budgets: What You Need To Know |
How To Begin a Budget
Beginning a budget is fairly easy. The basic steps for creating a budget are as follows:
- Sum up the monthly income you anticipate from all sources
- Classify and sum up the monthly expenses you plan to pay
- Subtract expenses from income
- Your goal should be to see how much you have coming in and to make a plan for what goes out.
Step 1: Sum Up Monthly Income
Think of all your potential sources of income: wages from your job, fees from clients if you are a freelancer or gig worker, or revenue you've generated if you run your own business. If you get regular payment for disability, Social Security, alimony, or child support, include that, too.
Make a list of each source of income and how much you usually receive per month. Use the net amount, not the amount you earned before taxes. If the amount you receive varies from month to month, try using an average amount instead.
Step 2: Sum Up Monthly Expenses
Next, make a list of all of your regular monthly expenses. Include fixed expenses, such as rent, mortgage, or insurance. Then, list your variable expenses—the costs that fluctuate from month to month. Some examples are food (both groceries and restaurant purchases), gas, and entertainment.
Try to document everything you spend money on. You can use a special app, budgeting software, or even just pen and paper. Checking your bank and credit card statements can help you recall any expenses you've missed.
Step 3: Deduct Expenses From Income
Lastly, deduct your total monthly expenses from your total monthly income. You're doing well if you expect to have money left after doing this calculation.
If you think you’ll come up short, review your expenses to look for areas you can cut or eliminate. It’s especially important to compare needs versus wants at this point.
How To Follow a Budget
Creating a budget is one thing; following it is another. Following a budget may need these actions:
- Monitor expenses regularly
- Use cash if tempted to overspend with your debit or credit card
- Do weekly budget check-ins to ensure you're on track for your budget objectives
- Check your budget once a month to see if your income or expenses have changed
- Treat yourself to a small reward for following your budget for the month
If you have trouble with staying on budget, think about an accountability partner who can offer support, guidance, and motivation for following your budget plan.
When picking an accountability partner, avoid someone likely to be critical of your spending choices or offer advice that isn't helpful.
Types of Budgets
In its basic form, a budget forecasts and monitors income and expenses over a certain time period. Budgets need you to deduct expenses from income. If you have money left, you have a surplus. If your outgoings exceed income, you have a deficit. If spending and income are equal, that's a balanced budget.
Personal budgets are budgets that ordinary people create to manage their income and expenses, and are generally simpler than corporate or government budgeting, with fewer costs to track. Different budget methods may work best for different people.
Zero-Based Budgeting
Zero-based budgeting involves budgeting your income down to the last cent. The goal is to assign every cent a role so there's no money squandered or left over. Businesses, governments, and other organizations can also apply this budgeting method.
Cash Envelope Budgeting
Cash envelope budgeting allocates specific budget categories to individual envelopes. Each envelope is filled with the amount assigned to that budget category. Once you use up all an envelope’s cash, you can't use anything else in that budget category for the month.
Percentage-Based Budgeting
Percentage-based budgeting allocates money to different containers. For example, you might allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. With her daughter Amelia Tyagi Warren, U.S. Senator Elizabeth Warren wrote a popular 2005 book on the 50/30/20 budget rule called “All Your Worth: The Ultimate Lifetime Money Plan.”
Budgets can be adaptable, too, and you can always invent your own budgeting “rules.” For example, you might decide you want to give 3% to 10% of your net income to charitable causes.
Budgeting apps can make the process of managing income and expenses easier; it's important to know which budget method the app uses.
Pros and Cons of Budgets
Pros:
- Allows control over spending and saving: You can choose which budget categories to include and how much to allocate in each category. Also, if you commit to saving for a specific named savings account (such as “Hawaii Vacation”), you may form a regular savings habit.
- Helps monitor expenses: If you have trouble with overspending, a budget tracks where your money goes, so you can spot potential harmful spending patternsand eliminate unnecessary costs.
- Can ease financial stress: A budget can ease stress by providing a tool for planning and building emergency savings, which is extra peaceof mind when an unforeseen expense occurs.
Cons:
- Seems limiting: One of the most commonbudgeting challenges many face is the feeling that you somehow restrict yourself. Balance that by leaving room in your budget for "fun money" so you don't feel deprived.
- Needs commitment: Budgets can help youtake charge of your finances—but only if you follow the plan you've created. If you're not dedicated to your budget, you may not enjoy the benefits of budgeting.
- Relies on impulse control: If you’re accustomedto spending money whenever you like, you may need to acquire new habits around checking your budget before going out with friends or indulging in a new outfit.
If your budget involves saving, think about keeping your nest egg in a high-yield savings account, which can offer higher returns and lower fees.
Personal Budgets vs. Corporate Budgets
Personal budgets and corporate budgets are very different. Personal budgets relate to how you use your personal income. Common budget categories might include housing, utilities, groceries, and transportation. For a personal budget, most people try to lower debt such as loans and credit cards, and may stress saving for retirement or emergency funds.
Corporate budgets, on the other hand, handle the kinds of expenses businesses usually have. So a corporate budget may involve capital expenditures, debt servicing, or payroll. While businesses may have cash reserves, they may not often add to them out of budgetary funds. With a corporate budget, debt isn't always a bad thing if it's being used to finance growth or expansion projects that will later boost revenues.
Why You Need a Budget
A budget is important for managing your money. Without a budget in place, it's easy to overspend and end up in debt if you're always relying on credit cards or loans to fill the gaps.
You can try different budgeting methods to find one that suits you best. Just remember that budgets are not “set it and forget it.” Regularly check your budget to modify as needed, should your income or expenses change.
Frequently Asked Questions (FAQs)
What is the difference between yearly and monthly budgets?
Monthly budgets show your income and expenses one month at a time. Yearly budgets examine all the income and expenses tracked over a year. A yearly budget can be helpful if your income or expenses change a lot by month or season (for example, if you’re a freelancer) and you need to look at the whole. Yearly budgets can also be helpful for monthly budgeters, but only for looking at your larger financial picture. Monthly budgets may more precisely reflect your immediate actual income or expenses.
Why is a budget important?
Budgets are vital for tracking expenses and income, spotting spending habits, building savings, and preventing debt. A budget is a financial plan or guide for managing your money; without one, it may be easier to overspend or accumulate debt.