What is a budget?
A budget is a detailed plan of operations for a specified period of time. The operations include estimation of income and expenditure. It also includes creating a plan for your spending habits. Usually, a budget is created for one year. But weekly, monthly, or quarterly budgets can also be made.
Budgets are prepared by every organization (private or government) as well as individuals for better allocation of their finances.
Personal budgets help an individual to estimate their purchasing power. It also helps them to better understand their spending habits.
What is budgeting?
Budgeting basically refers to the process of creating a budget. It involves estimation of your income and expenditure and trying to create a balance between both.
Budgeting is closely connected with planning. This is because budgeting includes ‘planning how you will be spending your money’. That is why a budget is also termed a spending plan.
Key terms to know before creating a budget
- Budget chart: A budget chart is simply the spreadsheet in which an individual can enter his income and expenses to create a budget for a period of time.
- Forecasting: Forecasting means using historical data to predict future trends. Budgeting uses the forecasting data as an input to create financial plans.
- Budget constraint: Budget constraint refers to the all the combination of goods and services which a consumer may purchase. The consumer can only purchase those goods and services whose current prices are within his or her income. Therefore they are constrained by their budget.
- Budgetary control: Budgetary control basically means comparing your actual income and expenditure with the planned one to find if there are any deviations. Then taking some corrective measures to control those deviations, if required.
- Expense tracking: It means tracking your expenses daily and maintaining a record of your expenses. It includes tracking bills, fees, rent payments, and other outgoing charges.
Process of Budgeting
You can create a budget using a budgeting app, spreadsheet, notepad, or pen & paper, whatever suits you best. In all these ways following steps have to be followed:
- Estimation of revenue/income: The first step in the budgeting process is the estimation of your income from all the sources in a month. For estimating the income, analyze your total income from different sources from the past months.
- Estimation of expenses: Next step is to estimate all your expenses during a month. The expenses should include the cost of all your ‘needs’. Also divide your fixed (rent, insurance payment, debt payment, etc) and variable expenses (groceries, entertainment, medication, etc) into separate columns.
- Estimation of your financial goals: Next estimate how much you will be spending each month on your financial goals such as buying a house or a car, paying off debts, a family trip, etc. You can specify the minimum payments and also set aside amounts for any additional payments. Financial goals should be a priority for any individual as they make a smooth financial future for you.
- Estimation of extra expenses: Next step is to estimate the expenses for your ‘wants’ which you desire to have but are not a necessity. These can vary from person to person. Try to analyze what things you have spent your money on over the last months, what was necessary for you, and what were just mere desires.
- Estimation of seasonal expenses: Next step is to analyze seasonal expenses such as gifts, school dresses, hair salons, etc.
- Create a plan: Once you have estimated your income and expenses, you can make a plan on how much you are going to spend on various things and how much money you are going to save. If your expenses are more than your income, try to reduce the extra or seasonal expenses to create a balance between both.
- Invest the savings: It will be great if you are left with some money after all your expenses. You can save this money in a savings account. You can also invest it to create more money for your future.
- Stick to the budget plan and keep updating it: Following a budget is as important as creating it. You have created a budget based on your previous income and expenditure. Try to stick to the budget but also make changes in it if necessary according to your present conditions.
I hope this article helped you to understand the process of making a good budget. We will talk more about budgeting in further articles.
If you follow your budget wisely, your savings will become your future income. Just don’t be too strict with yourself. Follow the budget you have prepared and make changes to it whenever necessary.