What is a Budget?

We’re sure you’ve heard all about how a budget is necessary in order to be a “real” adult (whatever that means).

But maybe you aren’t entirely sure what a budget actually is and why you need to have one in the first place.

We get it.

It can be difficult to understand why you need to have a budget if you make plenty of money and have plenty saved in your bank to cover all your expenses.

If that is the case, then that’s great!

But, simply knowing you have money sitting in the bank doesn’t actually tell you much about your financial health and how that money can help you reach the goals you may have for yourself and your family.

So, let’s look at what a budget actually is at its core.

Budget Basics

So let’s start off with a basic definition.

A budget is a method of allocating and tracking your income and expenses which determines your savings (or debt) to set and achieve your financial goals. 

Now that’s a great definition on the surface, but let’s jump into what that all means.

Types of Budgets

There are so many types of budgets.

Personal budget. Travel Budget. Business budget. Division budget. Government budget. 

These are all great types of budgets, but we are mainly interested in looking at personal budgets today.

Income and Expenses

A personal budget is made up of your income (yay!!!) and your expenses (boo!!!). 

The goal is to determine how much income you’re going to make over a specific time period (monthly, quarterly, annually, etc.) and then set goals (or expectations) for your expenses. 

Typically, you spend the most time on figuring out what your expenses are going to be unless you work multiple jobs or have inconsistent paychecks (like being a freelancer). 

You may only have one source of income, but many different expenses. 

It’s pretty easy to come up with a list of 10 different expenses. Here are a few examples:

• Rent or Mortgage
• Transportation Costs
• Car Payment
• Electricity, Water
• Grocery Shopping
• Restaurants
• Trips
• Clothing
• Toiletries
• Electronics

You could probably come up with another ten categories just thinking about your last purchases. 

A budget is forward-looking but if it’s your first time making a budget, it’s a good idea to look back and see if you’re earning more money than you’re spending. 

For some budgets, like a nonprofit organization or a government, the goal is typically for income to match expenses. 

Ideally, when it’s all said and done for us though, we want to have as much as money left over after our expenses (duh).

Are you saving or are you “debting”?

If you are spending less than you’re earning, congratulations! That means you are saving!

But if you are spending more, that means you are “debting” <— Not a real word, but basically our created verb for going into debt.

Where does this debt show up? Typically, on your credit card or in another loan balance. 

For you and I, the goal is for your budget to produce a path to savings. That means setting goals for how much spend. 

And if you are currently “debting”, don’t panic. Anyone that is paying for college, a house, or a car is actually “debting”. 

Using your budget, you can set goals to reduce your expenses to pay off that debt and start saving. 

So, how do you budget?

Budgeting is fairly easy once you get the basics down. 

A good place to start is looking at your previous paystubs or paychecks to determine your income. Then, you want to look at your spending over that same time period to figure out your expenses.

From there, you can see if you’re saving or “debting” and set expectations for your future earning and spending.

Final Thoughts

So today you got a nice little Budget 101 course. You learned what a budget actually is.

Now that you know what a budget is, it’s time for a Frugal Financiers CHALLENGE!

We want you to figure out your own budget. Don’t be scared or think you have to stick with anything rigid.

Check out our post on simple budgeting here. You will find easy instructions on how you can create your own budget and start planning for those financial goals.

If you’re looking for some more info, check out some great resources straight from the US government. Click here to see what they have to offer.