What Is a Budget?

What is a budget?

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 of our favorites. Your after-tax income is divided into three categories: 50% for necessities like housing, transportation, utilities, loan payments and groceries; 30% for wants like travel, entertainment and dining out; and 20% for savings and paying off debt beyond the minimum payments.

» MORE: Learn how to categorize your expenses

» NEXT: Tips for building a family budget

What is the main purpose of a budget?

Budgeting isn’t about depriving yourself. Rather, the point of a budget is to take control of your money and 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 like buying a home, changing jobs, becoming a parent or getting a raise are likely to impact your financial situation.

To stay fresh, budgets should be reviewed and updated 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.

» Track your expenses for free with NerdWallet

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:

• 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.

1. 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.

2. Track expenses. Pick a timeframe, like one month, and make a list of what you spend money on during that time. 

3. 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.