The word budget is a fairly common financial term that gets thrown about whenever sometime’s having financial troubles or teetering 

In the journey to financial wellness, budgeting is often heralded as the cornerstone of success. 

Often when people hear the word budget, they think of something restrictive. Something meant to keep you from getting your morning Starbucks coffee or put a damper on fun outings with friends or vacations. 

But what exactly is budgeting?  And how can it help you?

What is a budget?

A budget is, simply put, a financial plan. It includes an estimation of an individual’s, household’s, or organization’s income/revenue and costs/expenses.  It typically consists of financial goals as well as a specified time period in which to meet those goals. It then serves as a tool for managing money and allocating funds to various categories.

The main goal of a budget is to ensure that spending/expenditures align with financial priorities and promotes savings, prevents overspending, and helps achieve short and long-term financial goals. 

So what is budgeting?

In general, budgeting is a process through which a detailed plan (budget) is created to help determine, allocate, and manage financial resources (mainly $$$) over a specified period of time. It involves estimating income and expenses, setting financial goals, and outlining how money will be spent, saved, or invested in order to achieve those goals.

At its most basic core, budgeting is a tool to help you take control of your finances and ensure you’re spending your money intentionally. 

Corporations or organizations often use budgeting to decide how much they can spend on a particular project or business endeavor.  

In our case, we’re wanting to look specifically at Budgeting on a more personal level – as an individual or a household.   

Personal Budgets vs Other Budgets

A personal budget is a budget for an individual while a household budget pertains to a group of people living under one roof. For the sake of making things easier, I’m going to consider personal and household budgets to be one and the same since they’re both budgets that would be used in personal finance. 

A personal budget is a financial plan that a person has come up with to deal with everyday costs and things needed in their life such as debt repayment, emergency fund building etc. – whether the budget is for you alone or your family.

Other types of budgets are mainly going to be government & corporate or business-related budgets. These can be sales budgets, production budgets, expenditure budgets etc – what they all have in common is that they are related to the finances of an entire company or organization, instead of someone’s personal finances. 

If you own your own company, then your corporate budgets might end up relating to your personal budget, but typically these are going to be kept separate. 

Why is budgeting important? 

The main purpose of creating a budget is not to punish or deprive yourself, it’s about learning about your personal financial situation and taking control of it to achieve certain goals – whether short or long-term.  

Budgets:

  • Provide Financial Clarity – Budgeting helps you assess and get a better picture of your financial situation – what you’re earning, where that money’s going, and what you might have left over. With that information you can get a figure out of areas where your finances are doing great …. or might need some work. 
  • Help Achieve Goals – Budgeting helps ensure you’re consistently saving or allocating money towards your specific personal and financial objectives. Want to get out of debt? Budgeting will help. Want to buy a house? Budgeting will help with that too. Want to retire early? You guessed it – Budgeting! 
  • Prevent Overspending – While it’s ultimately up to the spender themselves whether they overspend or not, creating a budget certainly helps with knowing what your spending limitations are which will then help you avoid bad debt. 
  • Reduce Financial Stress – With a budgeting plan in place, you’re better prepared to face all of the bills and financial woes that may come your way (and then some). 
  • Build Wealth – Budgeting helps ensure that both saving and investing your extra income become priorities, not afterthoughts. This helps set you up for a future of financial security and stability and hopefully a pretty comfy retirement.

Key elements of budgeting

Typically, a budget is going to consist of a couple different elements. Each of these elements is critical in ensuring your can effectively analyze your current financial situation, and help you create a budget that will help you meet your financial goals. 

  • Income – Income is the money that you earn from all sources, whether it be the salary from your main job, your side hustles, investments, or other income streams. In order to create a budget, you need to know how much money you’ll be earning throughout the year. Most of the time, the amount we earn from month to month is not exactly the same so your income will most likely be an estimated amount.
  • Expenses – Expenses at the things that cost you money. Like income, the amount is often not set in stone and will range from month-to-month, except for fixed costs, expenses that tend to remain the same over a certain amount of time. There are 3 main types of expenses:
    • Fixed Expenses – These are regular, recurring costs such as your monthly rent, phone bill (if on a fixed plan), insurance costs, and loan payments. 
    •  Variable Expenses – These are your costs that change from month-to-month, such as your grocery bill and utility bill.  
    • Discretionary Expenses – These are non-essential costs such as eating out, entertainment, or hobbies – typically these can be thrown in with your variable expenses to simplify things. 
  • Savings – Your savings are the money that you have set aside for short-term & long-term goals, emergencies, or investments.  This can be your savings account at your bank, owned certificates, investment accounts etc.  
  • Goals – Your goals for your budget are going to be the financial milestones that you’re striving towards. This can be anything from buying a car or house, paying off debt such as student loans, retiring early, or even just trying to stay financially afloat.
  • Timeline – A good budget should also include some measurable amount of time. This helps you to see if you’re on track to meet your goals. It’s also nice to have milestones to reward yourself for meeting mini-goals. 

Budgeting Methods

There are numerous different ways to make a budget, all with various pros and cons which may or may not work for your own specific situation and goals. Some of the most popular budgeting methods are: 

  • 50/30/20 Rule – This budgeting method allocates 50% of your income to needs, 30% to wants, and 20% to savings or paying off debt. 
  • Zero-Based Budgeting – Every dollar earned should have a specific purpose. With this budgeting method you take your income, and subtract every expense (including money going into investments etc) to equal zero in the end. 
  • Envelope System – This method uses either digital or physical envelopes to allocate spending towards different categories.  
  • Pay-Yourself-First – This method prioritizes savings and investments before any other expenses. 

The Budgeting Process

Conclusion

Budgeting is all about finding ways to make your money work for you–not the other way around. It’s a proactive way for you to manage your finances, avoid debt, reach goals, and build a secure financial future for yourself.