What is a Budget? Find Out Here

Time to get back to the basics.  To be successful with personal finance, it’s important to understand what a budget is and how to implement one into your own life.  Having a budget helps one live below his/her means.

What does this mean?  Living below your means means that the amount of money you make is greater than the amount of money you spend.

Typically, this is measured on a monthly basis and broken down into income and expenses.  Knowing how to budget is important on a personal and a business level.

INCOME:

Income is the amount of money that one receives (also called inflows).  The most common form of income is the money received from working a full-time or part-time job, which is generally received weekly or bi-weekly.

There are many other forms of income, but the purpose of this article is to understand the importance of a budget. The second part of the equation is the expenses.

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EXPENSES:

Expenses is more complicated than income, but in general it’s the amount of money that one has to pay out (also called outflows).  Another way to look at expenses are your monthly bills.  Examples of expenses are:

Utilities:

  • Electric
  • Gas (not all residences have this expense)
  • Water/Sewer/Trash

Shelter:

  • Rent or Mortgage
  • Renters or home insurance
  • Property taxes, household repair (If you own a house; also HOA is you live in a gated community or condo)

Transportation:

  • Car payment (if car is not completely paid for or if it’s being leased)
  • Car insurance
  • Fuel expense
  • Car maintenance & repair (oil change, new tires, etc.)

Health:

  • Food
  • Medical Insurance
  • Medical bills (if you have any not fully paid)
  • Gym membership (not everyone has this)

Misc.:

  • Cable/Internet (also optional)
  • Cell phone/landline
  • Pets
  • Entertainment
  • Emergency fund
  • Savings for retirement
  • Savings for future trips

And the list goes on.  The above stated expenses are mainly considered the basic expenses with the exception of a few.  But this gives you the right idea of what expenses are.  The larger the lifestyle, typically, the higher the expenses.  For example, the bigger the house you have or the fancier the car you drive, the higher your expenses are going to be.

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In business, the concept is the same as you have income (also known as revenue) and expenses.  It’s important to manage the inflows as well as the outflows.  Common business expenses are payroll, office lease, utilities, phones, insurance, etc.

The whole idea is to know how much money is coming in each month and how much money is going out.  Having an understanding of your cash inflows and cash outflows, helps one to spend money in a more conscious manner.  Incorporating financial management into your lifestyle or business can help you to achieve your goals.

Personally, I track my expenses each month and by managing my money accordingly; I am more aware of where the money goes instead of having cash in my wallet and being completely unaware how I spent it (wisely or foolishly).  Budgeting has allowed me to achieve a lot of my personal goals, such as traveling and increasing my savings while living a comfortable lifestyle.

Readers, any tips on how you budget?  Budgeting does not have a one size fits all approach.  What works for some people does not work for others.

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