Finance 101

Finance 101: What is a Budget?

Don’t freak out! Some people are terrified of budgets, others loathe them, but when it come down to it, the secret to financial success is budgeting! Budgeting does not have to be stressful. A well-designed budget will give you more financial freedom, not less.  Today lets talk about a beginner finance question – what is a budget and how do I use it?

What is a budget?

A budget is “an estimate of income and expenditure for a set period of time.” (Thanks, dictionary.com!)

Often, when you are first settling up a budget, it can feel restrictive. It feels like you are taking away your freedom by limiting your spending. However, a budget helps you spend money the way you want to. If you want to save 15% for retirement, find money in the budget. You might have to take some away from your eating out budget, or spend a little less on groceries. The mindset here is you can do anything, but not everything! For more on this mindset, check out Paula’s writing at Afford Anything. This mindset is life changing!

Why should I budget?

Budgeting is the key to managing your money. You can’t manage your money if you aren’t paying attention to where you are spending it! For providers with dependents, it is integral that you know you will have enough in the bank to pay for food, shelter, and other basic family needs. On top of that, you may want to set money aside for retirement, kids’ college funds, family vacations, and other expenses that are beyond your day-to-day spending. Budgeting helps you plan where your money goes so you can do the things your really want to do with your life (and your money!).

Budget Styles

In my experience, there are two categories of budgeters: the line-by-liners and the live-on-whats-lefters.

Line-by-line budgets track every penny they spend. They meticulously watch their expenses, allocate money, and plan where each pay check will go. They plan how much they will spend on groceries, eating out, entertainment.

Live-on-whats-left budgets take everything important – savings, retirement, mortgage, insurance, taxes – out of each pay check. Whatever is left is what you have to spend. This can be great because it forces you to live on less, but if you aren’t careful things may run out sooner than expected!

Both of the budgets have pros and cons, and the most important thing is picking a budgeting style that fits your life style and you can stick with long-term. I am a type-A control freak, so not only am I a line-by-line budgeter, I designed a fancy spreadsheet that helps me track my spending and forecast savings. I sit down every week and record spending, so that I can see how much will be left by the end of the month. At the very least, you should review your budget each time you get a pay check.

What goes in a budget?

If you are wondering what a budget should look like or how to set one up, stay tuned! I have a detailed post coming later this month (update – see my 10 minute excel budget here!). In the mean time, any regular expenses should be budgeted for. Try to make a list of any expense you pay for. Don’t let the tricky ones fool you – insurance premiums that come quarterly or every six months, holiday expenses, travel, and car maintenance should all be in there!

What budget is right for you?

So what budget should you use? That really depends. I recommend all budgeting beginners start with a line-by-line budget. This helps you get a realistic idea of what you are spending and where your money is going. This helps you see where you spend your money and what areas you can cut back in. If a line-by-line budget is stressing you out, give it two months (remember that you just need to learn your spending habits!) then switch to a live-on-whats-left budget.

As you get to know your spending habits and get in the habit of “budgeting,” you can find ways to manage your money better!  If you need help finding the right budget for you, I have just the post for you coming soon!  (Update – see the post here!!!)  In the mean time, you can start a basic excel budget to get the ball rolling.

So what did I miss? How do you budget?

 

Like this? Download your FREE family budget now!

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