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Basics Beginner: Building a Budget

Introduction to Building a Budget What Is a Budget? Budgets Compare Money Flowing In and Money Flowing Out What Are the Parts of a Budget? What Does a Budget Look Like? Economizing with a Budget Budgeting Rules of Thumb How Much Do People Typically Spend on Their Expenses? What Do Budgeting Tools Offer? What to Look For in a Budgeting Tool Types of Budgeting Tools Summary of Building a Budget
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Budgets Compare Money Flowing In and Money Flowing Out

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Budgets Compare Money Flowing In and Money Flowing Out

So why is budgeting subject to so much angst? Most persons don’t see the difference between income and inflows. Income is an inflow, but so is money taken from savings and money borrowed. Income is money earned from work, earned from investments, or received as a gift. Some people try to spend more income than they have, ultimately causing problems in the future, when the budget must be balanced with inflows from either savings or borrowing. Here is a simple example:

Budget Example 1

The negative $3 cash flow tells us that to balance this budget, Sonny needs an additional inflow of $3. If Sonny had previously saved some money, then he could easily take the $3 from savings and his budget would look like this:

Budget Example 2

If Sonny didn’t have any savings, one of two things would happen: He would either have to postpone one of his purchases or he would have to borrow the cash from his mother or another lender.

Budgets are also called "cash-flow management"

A budget is merely a way to identify cash coming in and how we spend it. It can be a valuable tool for planning future spending and for making investment and borrowing decisions. When used to make decisions about future spending, saving, and investments, it is called cash-flow management.