What Is a Budget?
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Budget definition
A budget is a spending plan that outlines your income, expenses and other financial goals like savings and debt paydown. It’s an estimate of how much money you’ll make and spend over a certain period of time, such as a month or year.
Budgeting can involve making a comprehensive list of expenditures or just focusing on a few categories. Some people prefer to write their budget out by hand, while others use a spreadsheet or budgeting app. There’s no correct way to budget — what works for one person might not work for another. The key is finding a method that fits your style and sticking to it.
When it comes to picking a budgeting method, the 50/30/20 budget is one option. Your after-tax income is divided into three categories: 50% for necessities, such as housing, transportation, utilities, loan payments and groceries; 30% for wants, including travel, entertainment and dining out; and 20% for savings and paying off debt beyond the minimum payments.
If that 50/30/20 breakdown isn’t feasible for you, consider the 60/30/10 budget or other types of budgets that may better fit your goals and challenges.
» NEXT: Tips for building a family budget
What's the primary purpose of creating a budget?
The purpose of a budget is to take control of your money and to help you achieve short and long-term goals. The idea is to make your budget as personalized as possible while also leaving room to adapt because surprises (and mistakes) will happen.
Making a budget shouldn’t feel like a punishment. Remember, it’s a plan for all of your money — that includes money for fun stuff, too.
A budget is dynamic and should change with your circumstances. Life events, such as moving, changing jobs, becoming a parent, experiencing a shift in income or taking on caregiving responsibilities are likely to impact your financial situation.
Aim to review and update your budget periodically. Some people choose to do this monthly, bi-monthly or twice a year, depending on life changes. The idea is to make your budget as personalized as possible but also leave room to adapt because surprises (and mistakes) will happen.
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Why is budgeting important?
Budgeting benefits everyone, not just those who struggle financially. It encourages you to put your money to work in the best way possible and can help you identify overspending. Think of a budget as a next step toward reaching your financial goals. It can help you:
See where your money is going. Tracking expenses and income clearly shows how much you have to save, spend or pay toward debt. Once you spot patterns, you can identify where to make adjustments. For example, maybe your budget shows that you spend less than you earn, but you’re paying for some subscriptions or services you no longer need. So you know to cut that expense.
Plan for upcoming expenses. Budgets can also help you plan for how you’ll cover upcoming expenses, including rent or car payments. Mapping out expenses in advance can help reduces the risk of overspending.
Save for the future. A good budget coaxes you to earmark money for an emergency fund and savings goals like a vacation or retirement.
Get out of debt. Budgets can help you understand how much of your money to put toward debt, as well as how to prioritize different types of debts.
Relieve stress. Budgeting isn’t a cure-all, but it can help you manage financial decisions and prepare for challenges.
How do you start a budget?
Ready to give budgeting a whirl? Start with the basics.
Outline your income. Income represents the money coming into your household. This includes all sources of income — including salaries, tips, Social Security payments and more.
Track expenses. Pick a timeframe, like one month, and note what you spend money on during that time.
Review account balances and debts. Note your current bank account balances and debt obligations, such as a car loan or mortgage.
Next, identify your priorities and find the right budget system for your needs. Aside from the 50/30/20 budget we mentioned earlier, other common budgeting systems include the 60/30/10 budget, the envelope system, the zero-based budgeting system and pay-yourself-first budgeting.
Stick to the budget that best suits your personality, lifestyle and finances.
