What Is a Budget?

A budget is a complete listing of one’s income and expenditures over a specified period of time. Usually, household budgets are established on a monthly basis, because most bills are paid monthly. The purpose of a budget is to allow an individual or couple to have a plan that will allow them to meet all of their financial obligations and, as well, to save for emergencies and/or future needs or wants. Without a budget, spending can go awry, and debt can accumulate to an extent that causes stress, bad credit, and family discord.

The Steps in Budget Preparation

For one who has never established a budget, the important first step is to spend one month writing down all income and expenditures. These expenditures must include even the smallest items, such as a morning coffee, or the budget will not reflect reality. Once this is completed, the following steps will be necessary:

1. Divide expenditures into columns of “necessities,” “occasional needs,” and “luxuries.” Examples of necessities are food, utility bills, rent or mortgage payment, etc. Occasional needs include such items as clothing, shoes, a dental bill, etc. Luxuries are those things one could do without and still carry on all life functions. These might include entertainment items, such as dinner out, bowling, or those small items like morning lattes.
2. The necessities column becomes an immediate part of your budget. Add them up and subtract them from your income. Now you know how much is left for the other two columns. Note that there are some necessities that are not paid every month, but you still need to provide for them. Water bills, for example, usually come every two or three months. Car insurance premiums may be due every 3, 4 or 6 months. You provide for these by dividing the usual payment out over the number of months between payments, and placing that amount in the necessities column.
3. Add up the column of occasional needs, and make your best-guess judgment of the amount that occasional needs will cost each month. Add the items in this column and subtract it from the balance left after necessities.
4. The amount remaining after subtracting monthly and occasional necessities is the allotment for luxuries and savings. A smart, responsible person will be certain that, no matter how small, a certain amount is placed in savings each month, before any luxury items are considered. This is a key component to a budget, because emergencies and other unforeseen expenditures will always occur. If money is available for these, then no credit card or loan debt will have to be incurred for them.

What About Credit Cards?

If credit card debt is a part of your monthly expenses, make the best effort possible to put into your budget a monthly payment that is greater than the minimum. Only in this way can you get this debt paid off as quickly as possible. As the balance goes down, do not reduce your payment. As well, any “windfall” money should go toward this debt, so that it can be eliminated. Credit card debt creates the biggest damage to a budget, and large credit card debt reflects irresponsible spending and/or failure to budget correctly.

Living Within One’s Means

It is often difficult to do without the things that we would like to have or to defer purchases because the cash is just not available. But responsible spending involves not spending what one does not have. If you can stick with a budget and do without in the short-term, you will see your savings grow, you will sleep at night, and the monthly bill-paying experience will be painless.