What Are the Parts of a Budget?

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What Are the Parts of a Budget?

A successful cash-flow management plan starts with a written budget. In the budget, one defines sources of cash inflows and expenses (cash outflows). The inflows and outflows must balance. There are three sources of inflows: income, savings, and borrowing. There are many outflow items, but they are usually described as expenses and grouped together in a few common categories in order to simplify the written plan. Some expense items may be used as income tax deductions and are customarily grouped to make it easier to identify for income tax return calculations.

Your expenses are either fixed or variable

Expenses may be fixed or variable. Fixed expenses recur each period (month) and include items such as mortgage or rent payments, automobile payments, utility bills, etc. Variable expenses generally do not recur each period or their amounts are very different from month to month. Variable expenses include entertainment and vacation costs, and purchases of clothing and household items, etc.

Expenses are either discretionary or non-discretionary

Expenses may also be discretionary or non-discretionary, depending on whether one has a choice of incurring the expense or an option of when to incur the expense. For example, paying the utility bill is non-discretionary, since if one doesn’t pay it, the utility company can turn off service. Purchasing a replacement automobile is discretionary (left up to your own judgment), since one can choose to buy a new or used car, a luxury or economy car, or can choose the timing of the purchase—now or in the future.