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What Is a Budget? A Comprehensive Definition

What is a budget? The definition of this essential financial tool that plays a critical role in our life requires a comprehensive approach.

What is a budget?

A budget is a tool that helps you visualize how much money you expect to make and how you will spend the money within a specified time period. It is usually put together on a periodic basis. In addition, it is re-adjusted constantly to capture new personal realities and socio-economic evolution.

If you make money, you need one. Hence, anything that makes money is subject to budgeting. Whether you are a business, a person, a family, or a government entity you need one.

Why is a budget important?

Living at par with your income level is important because it provides financial stability and peace of mind.

Two essential reasons highlight, the significance of this financial planning tool.

Planning how to spend your hard-earned money, makes it painless to meet your financial obligations in time such as rent, credit card debt, groceries, and utilities. Also, budgeting your expenses turns out as the best way to build an emergency fund. Besides, a good budget plan helps you save for major investments such as buying a car or a home. Equally, it forces you to not spend the money you don’t have.

Secondly, a budget is important as it helps you reevaluate your income level against your needs. After, putting on writing your finances, you can decide to find new income sources or cut your expenses to meet your goals. Finally, it helps you plan for a retirement stress-free life.

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What are the main characteristics of a budget?

A budget needs to be flexible, timely, and realistic.

Flexible

Things change and life circumstances evolve. As a consequence, you have to be able to quickly adjust your finances to meet the moment. Actually, it’s recommended to review your budget constantly depending on your periodicity.

Timely

This makes sense only if it is planned for a specific period such as a week, month, quarter, or a year.

Realistic

Your plan must rely on your current net income and your expenses. If you decide to forecast those critical aspects try to be as pragmatic as possible.

What are the two-part of a budget?

A budget is based on your net income. That is your gross income minus taxes, retirement plans, health insurance disability insurance, life insurance, and other deductions taken directly from your paycheck.

The second part of your tool is your expenses. Start by writing down your regular expenses such as rent or mortgage, car notes, subscription plans, and loans. They are fixed and barely change. Then, list your variable expenses such as groceries, utilities, gas, and entertainment. That is because they change month after month.

Exceptionally, some people might decide to save a percentage of their net income on a fixed term. For instance, if you choose to save 10% of your income regularly then you can consider that as a fixed expense on your budget.

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What is a budget surplus?

A budget surplus is when your income is higher than your total expenses(general expenses plus monthly saving target). If you happen to be in this situation you are considered a super saver.

A budget surplus is generally used to pay off debt quickly, save for the future, or make a major purchase. A budget surplus indicates good financial health.

What is a budget deficit?

A deficit means your spend more money than what you bring in. This is because you live above your means. As a consequence, you are in red and your excess expenses are generally financed with debt. You either downsize your expenses or bring in more money to balance your finances.

What is a balanced budget?

If your expenses are the exact amount as your total income then your budget is balanced. With a little effort, you can realize a surplus if you look carefully into your expenses.

How to organize your budget?

Start by listing down all your expenses. Then, group them by categories to make it easier. You can either group them by food, entertainment, utilities, or travel. You can also structure your expenses by fixed expenses and variable expenses.

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