What Is a Budget?
(2 of 7)
What Is a Budget?
A budget is a simple tool that helps you create a savings and spending plan, and it is the key to financial freedom.
A budget is a written record of your income (I), expenses (E), and savings (S). It helps you plan how you want to spend and save your money. Your goal is to spend your income wisely. To get ahead, your expenses should be lower than your income. If they are, you have money to save to help you reach future goals. There is a simple formula to commit to called the financial freedom formula. If you follow the financial freedom formula and commit to not overspending, you will be well on your way to achieving your financial goals.
Things To Know
- Follow the financial freedom formula: Income - Expenses = Savings.
- People who make and stick to budgets have more savings and less debt and feel better about their financial situations.
Budgets don’t have to be complicated. Even the simplest guidelines around spending can make the difference between financial solvency and getting into too much debt. People who make and stick to budgets tend to have more savings and less debt and feel better about their financial situations. Creating a budget is a worthwhile endeavor no matter what your financial situation is.
Budgeting is worthwhile
Without a budget, it is all too easy not to have any idea how much money you and your family are spending and where that money is going. And without some idea of what you are spending money on, from a mortgage payment to groceries to utilities to day care, you risk running out of money before all your bills are paid. Budgeting is no more and no less than creating some kind of plan so that what you spend and save equals what you make or what you and your spouse or partner make. Let’s take a look at the steps in the budgeting process and a budget worksheet.
Building a budget
To build a budget, you need to start by gathering information about your monthly income, expenses, and savings. Using a month as your timeframe allows you to efficiently verify your income and identify your spending and saving amounts.
Step 1: Income (cash inflows)
The best way to get information about your income is to get a copy of your pay stub; if you have other income that you receive regularly, such as income from a side business or rental properties, include this amount also. If your other income is irregular, you may want to leave it out of your budget and determine how you want to spend and save it when you receive it.
Step 2: Expenses and savings (cash outflows)
Then, start to pull in information about your expenses. Your checkbook, bank statements or online banking bill pay system is a good place to start. You’ll want to include all your bills, such as mortgage or rent, taxes, property, health and car insurance, utilities, car payment, daycare expenses, credit card and other loan payments, entertainment, phone and cable bills, clothes, haircuts, groceries, and any other expenses you have.
An important habit to build into your budgeting process is to "pay yourself first." Treat creating savings goals as a top priority cash outflow. In essence you are creating a category for ensuring you allocate some of your net income to savings goals.
When building your budget, account for any monthly savings programs you have in place. If you automatically transfer a specific dollar amount each month to a savings or investment account, list it as a cash outflow. Obviously this is a good cash outflow as you are putting money away to help you with future goals.
Step 3: Monitor and revise your budget
Monitoring and revising your budget is an important part of the budgeting process. Once you establish your budget, you will want to compare your actual income and expenses for the month to the amount you budgeted. Ask yourself, "How’d I do?" by answering these questions:
- Was my income what I thought it would be?
- Did I spend more or less than I budgeted?
- Did I save what I said I would save?
- How do I feel about how I spent my money?
- What changes will I make to spending and saving?
To make changes in a budget, just add in new expenses, subtract expenses that you don’t have any more, and make adjustments to the amount you spend in various expense categories. The same holds true for making adjustments in savings and income. It’s all a matter of making choices based on your goals.
Would you prefer to watch a video? If so, click here.