What is a Budget?
What is a Budget?
A Budget is a plan. Merriam-Webster defines a budget as “a plan for the coordination of resources and expenditures,” and “the amount of money available for, required for, or assigned to a particular purpose.” It is a plan of how income is spent. Every plan has a goal, so what’s the goal of a budget? Well, it has 3 goals:
When comparing your money, you look at your income versus expenses. A budget at its core is a simple equation: Income – Expenses. If income is greater than your expenses, then you have a surplus. Now, if your income is less than expenses, you have a deficit. And if your income equals your expenses, you have a net. When I first started budgeting back in my college days, I had a surplus thanks to student loans in deferment and campus meal plan. In comparing my income to my expenses, I was quickly aware if I had a budget issue. In my case, the surplus was something that I recognized and saw an opportunity to adjust my plan. Many times we created budgets based on what we want to spend and not what we can (income).
A budget allows us to OTC (Organize, Track, and Control) our money. Every budget has some number of categories from 2 to over 20. The categories help us organize how our money is coming and going. We assign income to categories and track our spending to watch if our plan is staying on track. Control is the most important part of the plan. Life happens and the plan will get off track, but controlling our plan will allow us to make adjustments as needed. Plans are never set in stone; they are fluid and can change whenever needed. Many plans fail because of not adhering to OTC with money.
To me the fundamental purpose of a budget is to save money. Let’s be honest, if we didn’t need to save money or avoid/payoff debt, why would we budget. Maybe, for the fun of it. To save, we must get our spending in other areas in line. So, it’s important to know what our income and expenses are and to organize, track and control them. Saving money can help you be prepared for the future and become financially independent.
As the saying goes, “A failure to plan is a plan to fail.” Sadly many of us fail to plan (budget) and see failures in our personal finances. A budget is the foundation to our personal finances. It can be hard and painful, but life is harder and more painful when you don’t have one. So, create a budget if you don’t already have one.
Be WIZE with MONEY