- A budget is a plan for your money, within a certain amount of time. Making a budget means figuring out how much money you’ll have, what you need to pay for, and how much you’ll have left over.
What is a Budget?
A budget is an organized plan for how much money you can spend over a certain amount of time.
When making a budget, starts with how much money you’ll have during that period (like a month or a regular pay period), what bills and regular expenses (like groceries and gas) you’ll need to pay and how much you’ll have left over to spend on yourself and/or save.(1)
A budget can be made for an individual, business, family, or government — really any entity that spends money.
How do I create a budget?
There are many methods for making a budget. Here are some general tips and questions to ask yourself when creating a budget:
- To visualize your budget, write down how much you spend and what you spend it on every day for a month.
- What are your financial goals (buy a car, buy a home, take a vacation, pay school tuition)?
- How much time would you like to budget for (a week, a month, the year)?
- How much money will you make during that time?
- Where are you going to spend your money? (Make a list of monthly expenses like rent or mortgage, utility bills, groceries, gas, etc.)
- Subtract your expected expenses from your expected income. This number will tell you roughly how much of a surplus or deficit you’ll have for the period of time (see below), then adjust as needed.(2)
A great way to get started is to not over-complicate it. In its most simplistic form, a budget is simply your income minus your expenses. If the result is a positive number, that’s your surplus. If the result is a negative number, that’s your deficit.
What is a Surplus?
When you have more income than expenses, the money that remains is called a surplus.
Maybe you have paid for rent, utilities, groceries, credit card bills and you have a little bit of money left — that’s a surplus.(3)
The best use of a surplus is to either save it or use it to pay down debt. Any non-essential expenses (like dining out or expensive shopping) should come from your surplus.
What is a Deficit?
Conversely, when you have more expenses than income, that is called a deficit.
If you spend more than you earn, you may find yourself wondering how you’ll pay essential bills like your rent, mortgage or utilities. When people find themselves with a deficit at the end of the month, many turn to credit cards or payday loans. These are typically bad strategies as they create more financial problems like debt and maximized credit cards.(4)
Why should I have a budget?
By creating (and sticking to) a budget, you remove the element of surprise when it comes to your personal finances.
When you know how much you can spend for a set period of time, you’ll use your money more responsibly to afford life’s necessities. You will also be able to plan and save money in order to handle unforeseen future expenses.
- “Budget.” Investopedia. Accessed March 18, 2016. https://www.investopedia.com/terms/b/budget.asp.
- “Making a Budget.” Consumer.gov. Accessed March 18, 2016. https://www.consumer.gov/articles/1002-making-budget.
- “Surplus.” Investopedia. Accessed March 18, 2016. https://www.investopedia.com/terms/s/surplus.asp.
- “Deficit.” Investopedia. Accessed March 18, 2016. https://www.investopedia.com/terms/d/deficit.asp.