What Is a Budget?

What is a budget?

A budget is a spending plan based on income and expenses. In other words, 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. (Or, if you're accounting for the incoming and outgoing money of everyone in your household, that's a family budget.)

Budgeting can involve making a comprehensive list of expenditures or 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.

That said, the 50/30/20 budget is one of our favorites. This method suggests you spend about 50% of your monthly after-tax income on necessities, 30% on wants and 20% on savings and paying off debt.

What’s the purpose of a budget?

Budgeting isn’t about depriving yourself; it’s about taking control of your money. This can make it easier to achieve short-, mid- or long-term goals.

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 doesn’t have to be rigid. In fact, it should change as your circumstances change — when you get a raise, for example, or become a homeowner. Budgets can be reviewed and updated periodically. Some people choose to do this monthly, bi-monthly or twice a year, depending on life changes that occur. The idea is to make your budget as personalized as possible, leaving room to adapt. Surprises (and mistakes) will happen.

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 what's soaking up too much of your cash. Think of a budget as a steppingstone to your financial goals. It can help you:

• Understand your relationship with money. Tracking your income and expenses paints a clear picture of how much you have to save or spend. Once you spot patterns, you can identify where to make adjustments. Maybe you spend less than you earn (way to go!) but you’re paying for some subscriptions or services you no longer need.

• Save for the future. A good budget coaxes you to earmark money for an emergency fund and savings goals like a vacation or retirement. Here's how to work out how much you should save each month.

• Get — or stay — out of debt. Mapping out expenses in advance reduces the risk of overspending and can help you pay off debt you already have.

• 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 make a list of 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. Some common budgeting systems include the 50/30/20 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.

If you get stuck, try these budgeting tips.

What’s next?