Budget

Budget summary:

• A budget is a system for planning and tracking your spending, usually on a monthly basis.

• A budget could help you understand your lifestyle costs and meet your financial goals. 

• You can use different budgeting methods to make the process as easy as possible.

Budget Definition and Meaning

A budget is a system for tracking your spending, typically on a monthly basis. A budget details your monthly expenses and shows what they amount to. There are different types of budgeting methods you can use, depending on what you find easiest. Comparing your monthly expenses to what you earn could help you keep your spending to a comfortable level and meet your financial goals. 

Key Features of a Budget

Your monthly budget should include a list of the different things you spend money on. Some of those might be essential expenses like:

• Rent or mortgage payments

• Car maintenance or transportation

• Cell phone service

• Medications

• Insurance

• Childcare

• Debt payments

Other expenses may be less essential, but important to you nonetheless, like:

• Cable or streaming services

• Subscription boxes

• Restaurant meals

• Social activities

• Travel

Some of the expenses in your budget may be fixed, while others may be variable. Your car loan or mortgage payment is a fixed cost that stays the same every month. On the other hand, the amount you spend on groceries could change, as could your commuting costs to work, depending on the price of gas.

To factor your variable costs in your budget, you can use an average of what you spent in the previous three months. For example, if your past three months of groceries cost $300, $350, and $400, respectively, it’s reasonable to allocate $350 in your budget for groceries every month. 

Methods of Budgeting

Different budgeting systems you can use include:

• A spreadsheet to track monthly expenses

• A budgeting app that links to your debit and credit cards to track expenses

• The envelope method, where you put physical cash into envelopes that are earmarked for different bills

Try out different budgeting methods to decide which one is easiest for you.

Approaches to Budgeting

There are different approaches you can choose to use when creating a budget:

• The 50/30/20 method has you spending 50% of your income on essential bills, 30% on discretionary expenses, and 20% on savings.

• The zero-sum budget method has you assigning every dollar you earn to needs, wants, and savings or financial goals.

• Reverse budgeting has you first allocating money toward savings, and then spending the rest of your earnings on bills.

Real-Life Budget Example

A real-world budget might look like this:

Monthly pay: $3,000

• Rent: $800

• Car payment: $400

• Commuting costs: $150

• Car insurance: $200

• Utilities: $200

• Cable and home internet: $100

• Cell phone: $100

• Groceries: $350

• Healthcare and medications: $100

• Leisure and discretionary spending: $300

• Savings: $300

You can adjust your spending in different categories to allocate more money to others. If you want to boost your savings by $100 a month, for example, you can reduce your leisure spending by that much. 

Always check up on your budget every few months to make sure it’s still accurate, since your expenses can change over time. And update your budget when you’re notified of a change, like an increase in your rent.