What is a Budget?

As much as we cover all the different aspects of budgeting sometimes it’s important to step back and answer the basic question of “What is a Budget?” In this post we’ll cover exactly what a budget is, how to budget your money and give you some different ideas to help you create a monthly or weekly budget.

Definition of a Budget

To answer the first question we’ll define exactly what a budget is. There are a few different definitions that you’ll find throughout the web, as you see in the image above Google defines a budget as “An estimate of income and expenditure for a set period of time.”

While that’s a pretty good definition, Wikipedia seems to make it a bit clearer, especially for the purposes that we want to address in this post. Notice as you read the definition below that they address the fact that your personal budget should be centered on a plan.

“A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending.”

They say that your personal or family budget should be a “financial plan” that it’s a “list of all planned expenses and revenues” and that it’s a “plan for saving, borrowing and spending.” It’s important to point out the fact that they stress planning so much as an essential part of budgeting.

Planning a budget- When you start figuring out how to budget your money the first step that you need to take is to create a plan. When most people hear about “planning” their personal budget they are left wondering exactly which aspect of their budget they need to plan. When you begin planning your budget there are three main things you need to do:

  • Identify and Categorize Expenses- If you want to start a budget you need to know where you are currently, part of that initial assessment is laying out all of your expenses. Your expenses will include all of your bills such as power, water, city fees, home owner association fees, mortgage or rent, insurances, internet, cable, satellite and many, many more. Also, as we’ve recommended in other posts it’s always good to take the expenses that you pay once a year and divide those by 12 so that you can add them to your monthly expenses. Once you have all of your expenses figured out you’ll want to break them into categories such as food, gas, clothing, etc…
  • Identify Income- Once you’ve outlined all of your monthly expenses the next step is to compare that to your total monthly income and see if you are coming up short each month or if you have an excess.
  • Eliminate Unnecessary Expenses- Once you know how much you are either saving or losing each month the next step is to start cutting unnecessary expenses. Unnecessary expenses are really any expense that is keeping you from your financial goal. Sometimes those expenses will be entertainment expenses such as going to a movie or out to dinner or if you have a considerable amount of debt that you’re trying to work your way out of you need to get more serious about cutting expenses like cable and sometimes even internet or cell phone plans. If you’re spending all of your income each month, or even more with the aid of credit cards your first goal should be to work down to only spending 90% of your income and using the other 10% to pay down debts. Once you’ve been able to adjust your spending to that level the next goal should be getting down to where you only spend 80% and use 20% to go towards paying down debts and eventually savings.

Practicing Your Budget- Once you have your budget in place the next step is to start putting it into practice. When people are first getting started with their personal budget they sometimes find it easiest to take all of their money for the month out in cash and divide it up into envelopes. The envelopes can be broken into categories such as Bills, Entertainment, etc.. You can divide your cash into all the envelopes and then once the cash is gone, it’s gone. While it doesn’t work perfectly if you already have online bill pay set up for some of your expenses it still helps you visualize where your money is going and make it all a bit more real for you.

Tracking Your Budget- Now that you’ve outlined your budget and you’ve began putting it into action; the next step is tracking your budget. There are several ways to do this, on a smaller scale you can simply just use a legal pad of paper with all of your expense categories outlined and keep track of where your money is going that way. If you want to get a bit more high tech you can use a personal budget spreadsheet or even online budgeting software like mint.com. Some of the more advanced tools like mint.com actually allow you to set up alerts to inform you when you’ve gone over your allotted budget for a certain category. Whether you go high tech or low tech tracking will be essential to your budgeting success.

Now that you know what a budget is and how to start one, your next goal should be to take action on this knowledge and begin working towards your financial goals.

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