What Is a Budget? Definition and Tips

A budget is a plan for 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 budget 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.

What is the purpose of a budget?

The purpose of a budget is to help you manage your incoming and outgoing money. Budgets show your income, as well as how much of it you are spending and on what. They also show how much you’re setting aside for savings, debts or goals.

With this view, budgets can help you make informed, intentional money decisions. For example, a budget may help you feel more empowered to set a certain amount of money each month toward a car purchase.

Or maybe your budget reveals that you spend more than you realized on a certain kind of expense, so you aim to spend less on it. Then you can put that money you save toward a goal, debt repayment or an emergency fund.

Why is budgeting important?

Budgeting 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:

See where your money is going. Tracking expenses and income clearly shows how much you have to save, spend or pay toward debt. Once you spot patterns, you can identify where to make adjustments. For example, maybe your budget shows that you spend less than you earn, but you’re paying for some subscriptions or services you no longer need. So you know to cut that expense.

Plan for upcoming expenses. Budgets can also help you plan for how you’ll cover upcoming expenses, including rent or car payments. Mapping out expenses in advance can help reduce the risk of overspending.

Save for the future. A good budget coaxes you to earmark money for an emergency fund and savings goals like a vacation or retirement.

Get out of debt. Budgets can help you understand how much of your money to put toward debt, as well as how to prioritize different types of debts.

Relieve stress. Budgeting isn’t a cure-all, but it can help you manage financial decisions and prepare for challenges.

What is a good budget?

When it comes to picking a budgeting method, the 50/30/20 budget is one solid option. Your after-tax income is divided into three categories: 50% for necessities, such as housing, transportation, utilities, loan payments and groceries; 30% for wants, including travel, entertainment and dining out; and 20% for savings and paying off debt beyond the minimum payments.

If that 50/30/20 breakdown isn’t feasible for you, consider the 60/30/10 budget or other types of budgets that may better fit your goals and challenges.