Elizabeth determining the projects budget would occur in which of the following phases
A budget plans for and tracks income and expenses over a specific time period. Businesses and governments rely on budgets to track revenues and expenditures, but you might be most familiar with a budget as a tool for managing your finances. Show
Different types of budget systems and methods exist. If you're wondering how to start a budget or why doing so is essential, this guide can help. Key Takeaways
How To Start a BudgetStarting a budget is relatively simple. The basic process for making a budget goes like this:
Your goal should be to see how much you have coming in and to set a plan for what goes out. Step 1: Add Up Monthly IncomeConsider all your possible sources of income: salary from your job, payment from clients if you are a freelancer or gig worker, or sales you've made if you run your own business. If you receive regular payment for disability, Social Security, alimony, or child support, include that, too. Make a list of each source of income and how much you typically receive per month. Use the take-home amount, not the amount you earned before taxes. If the amount you receive changes from month to month, try using an average amount instead. Step 2: Add Up Monthly ExpensesNext, create a list of all of your regular monthly expenses. Include fixed expenses, such as rent, mortgage, or insurance. Then, list your variable expenses—the costs that change from month to month. Some examples are food (both groceries and restaurant purchases), gas, and entertainment. Try to record everything you spend money on. You can use a special app, budgeting software, or even just pen and paper. Checking your bank and credit card statements can help remind you of any expenses you've forgotten. Step 3: Subtract Expenses From IncomeFinally, subtract your total monthly expenses from your total monthly income. You're ahead of the game if you project to have money left after performing this calculation. If you think you’ll fall short, revisit your expenses to look for areas you can reduce or eliminate. It’s particularly critical to compare needs versus wants at this point. How To Stick To a BudgetMaking a budget is one thing; sticking to it is another. Sticking to a budget may require these actions:
If you struggle with staying on budget, consider an accountability partner who can offer encouragement, advice, and motivation for following your budget plan. NoteWhen choosing an accountability partner, steer clear of someone likely to be judgemental of your spending choices or offer advice that isn't constructive. Types of BudgetsIn its simplest form, a budget plans for and compares income and expenses over a specified time period. Budgets require you to subtract expenses from income. If you have money left, you have a surplus. If your costs exceed income, you have a deficit. If spending and income are equal, that's a balanced budget. Personal budgets are budgets that everyday people make to manage their income and expenses, and are generally less complicated than corporate or government budgeting, with fewer expenses to track. Varying budget approaches may work best for different people. Zero-Based BudgetingZero-based budgeting involves budgeting your income down to the last dollar. The goal is to give every dollar a job so there's no money wasted or left over. Businesses, governments, and other organizations can also use this budgeting method. Cash Envelope BudgetingCash envelope budgeting assigns specific budget categories to individual envelopes. Each envelope is filled with the amount allotted to that budget category. Once you spend all an envelope’s cash, you can't spend anything else in that budget category for the month. Percentage-Based BudgetingPercentage-based budgeting assigns money to different buckets. For example, you might allot 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. With her daughter Amelia Tyagi Warren, U.S. Senator Elizabeth Warren wrote a popular 2005 book on the 50/30/20 budget rule called “All Your Worth: The Ultimate Lifetime Money Plan.” Budgets can be flexible, too, and you can always come up with your own budgeting “rules.” For example, you might decide you want to give 3% to 10% of your net income to charitable causes. NoteBudgeting apps can simplify the process of managing income and expenses; it's essential to know which budget method the app uses. Pros and Cons of BudgetsPros
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NoteIf your budget includes saving, consider keeping your nest egg in a high-yield savings account, which can offer higher rates and lower fees. Personal Budgets vs. Corporate BudgetsPersonal budgets and corporate budgets are very different. Personal budgets apply to how you spend your personal income. Typical budget categories might include housing, utilities, groceries, and transportation. For a personal budget, most people try to reduce debt such as loans and credit cards, and may emphasize saving for retirement or emergency funds. Corporate budgets, on the other hand, deal with the types of expenses businesses typically have. So a corporate budget may include capital expenditures, debt servicing, or payroll. While businesses may have cash reserves, they may not regularly contribute to them out of budgetary funds. With a corporate budget, debt isn't necessarily a bad thing if it's being used to fund growth or expansion projects that will later increase revenues. Why You Need a BudgetA budget is important for taking control of your money. Without a budget in place, it's easy to overspend and end up in debt if you're always turning to credit cards or loans to fill the gaps. You can experiment with various budgeting methods to find one that works best for you. Just remember that budgets are not “set it and forget it.” Regularly review your budget to adjust as needed, should your income or expenses change. Frequently Asked Questions (FAQs)What is the difference between yearly and monthly budgets?Monthly budgets detail your income and expenses one month at a time. Yearly budgets review all the income and expenses tracked over a year. An annual budget can be helpful if your income or expenses vary greatly by month or season (for example, if you’re a freelancer) and you need to look at the whole. Yearly budgets can also be useful for monthly budgeters, but only for looking at your bigger financial picture. Monthly budgets may more accurately reflect your immediate actual income or expenses. Why is a budget important?Budgets are essential for keeping track of expenses and income, identifying spending patterns, developing savings, and avoiding debt. A budget is a financial plan or blueprint for managing your money; without one, it may be easier to overspend or rack up debt. Was this page helpful? Thanks for your feedback! Tell us why! Other SubmitSources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. |