In this post we’ll cover exactly what a budget is, how to use one, and ideas to help you create a monthly or weekly budget of your very own.
At the Check City blog we like to cover all the different aspects of budgeting. But sometimes it’s important to step back and answer the basic questions like, what is a budget? Budgets are a great way to save money, get out of debt, and be more responsible with your spending so you don’t end up leading the stressful paycheck to paycheck lifestyle.
First, we’ll define exactly what a budget is, before we go into more detail about budgets in general. There are a few different definitions that you’ll find throughout the internet. Looking at several different places to understand its definition is a great way to have a rounded understanding of a word.
Google Budget Definition
Google is one of our greatest sources for finding quick definitions. As you can see in the image above Google defines a budget as:
“An estimate of income and expenditure for a set period of time.”
Wikipedia Budget Definition
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, a list of all planned expenses and incomes. It’s important to point out the fact that they stress planning so much as an essential part of budgeting.
Merriam-Webster Dictionary Budget Definition
But the best place to look at a definition, if you want the thorough, technical understanding of the word, is to look at an actual dictionary. The Merriam-Webster dictionary has an online website that has lengthy, but complete definitions of any word. This is how they describe the word budget:
a: a statement of the financial position of an administration (as of a nation) for a definite period of time based on estimates of expenditures during the period and proposals for financing them
b: a plan for the coordination of resources and expenditures
example: develop a budget for her company
c: the amount of money that is available for, required for, or assigned to a particular purpose
examples: a weekly budget for a family of five, a budget of less than $3000
So simply put, a budget can be a descriptor word meaning cheap (like how budget airlines are the cheaper airlines), a plan for the use of resources and expenses (like a personal budget), or it can reference how much overall money there is available for a specific purpose (like the budget available for a wedding).
Planning a Budget
But it’s not enough to know what a budget is—you also need to know how to use a budget. When figuring out how to budget your money the first step 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:
1. Identify and Categorize Expenses
If you want to start a budget you need to know where you currently stand financially. 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, homeowner association fees, mortgage or rent, insurances, internet, cable, satellite, and many, many more.
For expenses that you only pay once a year, like a Costco membership, we recommend dividing these payments by 12 months so that you can add them to your monthly expenses. That way you can easily include yearly expenses in your monthly budget as well. Once you have all of your expenses figured out you’ll want to break them into categories that make sense to you, such as food, transportation, clothing, etc.
2. 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.
A budget surplus is when total income is higher than total spending. A surplus in your budget is generally a good thing, it means you have plenty of money to stow away into college funds, emergency funds, and savings accounts. But if you already have these funds and accounts taken care of, a surplus can also mean you have extra money for a vacation, a new car, or to move to a better living situation.
A realistic understanding of your total income is important in every budget, because if you don’t understand how much you are making then you could end up with a budget deficit.
A budget deficit is when total spending is higher than total income. You can prevent deficits in your budget by following the third and final step to keeping a healthy budget:
3. Eliminate Unnecessary Spending
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 any expense that is keeping you from your financial goal. Sometimes you can cut out spending money on entertainment, like going to the movies or out to dinner.
If you have a considerable amount of debt you want to get out of, you need to get more serious about cutting expenses. You can even cut expenses like cable, internet, or cell phone plans so you can put as much money as possible into monthly debt and credit card payments. Going without for awhile will be worth it when those high debts are out of your life for good.
If you’re spending all of your income each month (or even more with the aid of credit cards) then 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.
How to Use a 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 use the cash envelope method. This is where you take all of your spending money for the month out in cash and divide it up into assigned envelopes. The envelopes can be broken into categories such as bills, groceries, entertainment, etc.
You can divide your cash into all the envelopes and then once the cash is gone, it’s gone. This way you aren’t able to accidentally spend more than you budget for each month by blindly swiping cards. This method will help beginner budgeters to visualize where your money is going and make it all a bit more real for you.
Where Should I Keep My Budget?
Now that you’ve outlined your budget and you’ve begun putting it into action, the next step is tracking your budget. There are several ways to do this. On a smaller scale you can 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 online budgeting software like mint.com. Some of the more advanced tools, like this website, actually allow you to set up alerts to inform you when you’ve gone over your allotted budget for a certain category.
You can also use Excel or make your own table in Word or Google Docs or any note taking program of your choice. There are also many free budget templates online that you can print out and use.
You can also use budgeting apps to keep track of all your bills, expenses, plans, and goals. Some of these apps even allow you to connect your budget to your financial accounts.
Budget tools are all around if you just take the time to look and decide on which ones best suit your needs. Now that you know what a budget is and how to start one, it’s time to take action and begin working towards your financial goals.
Watch a video from Khan Academy about budget lines.