When you look at your bank accounts, you likely have money coming in (i.e. income) and money going out (i.e. expenses). A budget can help you see where you stand and plan for any financial goals in the future.
What is a budget?
A budget is a spending plan based on income and expenses. In other words, 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. In some cases, a budget can last beyond a specific timeframe. (If you’re accounting for the incoming and outgoing money of everyone in your household, that’s a family budget.)
Budgeting can involve making a comprehensive list of expenditures or focusing on a few categories. Some people prefer to write their budget out by hand, while others use a spreadsheet or an Australian budgeting app like Beem or Frollo. There’s no correct way to budget — what works for one person might not work for another.
That said, the 50/30/20 budget is one of our favourites. This method suggests you spend about 50% of your monthly after-tax income on necessities, 30% on wants and 20% on savings and paying off debt.
What’s the purpose of a budget?
Budgeting isn’t about depriving yourself; it’s about taking control of your money. Making one 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 doesn’t have to be rigid. In fact, it should change as your circumstances change — when you get a raise, for example, or become a homeowner. The idea is to make your budget as personalised as possible, leaving room to adapt. Surprises (and mistakes) will happen.
Why is budgeting important?
Budgeting benefits everyone, not just those who struggle financially. It encourages you to live within your means and put your money to work in the best way possible. Think of a budget as a stepping stone to 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 that subscription beauty box that you no longer need.
- Save enough for the future. A good budget encourages you to put aside money for an emergency fund and savings goals like a holiday, home renovation or retirement.
- Get — or stay — out of debt. Mapping out expenses in advance reduces the risk of overspending and can help you pay off the debt that 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. That includes outlining your income, account balances and debts, and tracking expenses. Then, identify your priorities and find the right system for your needs.
If you’re in the United States, read this article on the NerdWallet US site.