Definition of a Budget

Budgets can help children, adults and companies better manage their money.

A budget, in financial terms, is a statement of financial position. It outlines the income and expenses of a person or company. In addition, budgets often include information regarding the source of income and expenses, rather then just totals. Budgets can be created to cover any time frame, from days to years. The longer period a budget covers, the greater the likelihood that the budget will be somewhat inaccurate, as financial transactions can be hard to estimate for dates in the future.

Personal Budgets

Personal budgets are an important method of controlling your spending and planning for your future. They provide a clear-cut method of tracking income and expenses. The use of a budget can help identify areas where spending is too high and help motivate you to cut costs.

Creating a Personal Budget

The first step in creating a budget is to carefully track where your money is going now. Gather this type of information for the period you want to budget for -- for instance, one month. Categorize your expenses and total up the amount spent on each type. Don't overlook spending on nonessential items, like your morning cup of coffee. At $2 per cup, that coffee accounts for $60 a month in spending.

Next, record your income for the month. Include any income your receive on a monthly basis, such as payroll or flexible spending account reimbursements. Use your computer or pen and paper to add your total income together. Subtract your total amount of expenses from the income. If your final sum is negative, it's time for some re-evaluation of your spending.

Evaluating Your Budget

The bottom line on your budget, after you've added income and subtracted expenses, is the amount you have left each month (if the number is positive) or the amount you're overspending if the number is negative. If you have a positive number, you're spending prudently. But you may still be able to save more by evaluating your budget.

If you've been overspending, closely examine your expenses. Some expenses are non-discretionary -- that is, they aren't optional. Items like your utilities bill, mortgage payment and food bills fall into this category. Be careful evaluating utilities bills. You may need the Internet access, but perhaps it doesn't have to be the super-high-speed service.

Discretionary income -- what's left after the essentials are paid -- should be the first target of reductions. This may include going out to eat, going to the movies or buying items you don't really need. This type of spending adds up very quickly. Attempt to cut out discretionary spending to make your bottom line appear where you want it.

Track Your Spending

The final step in budgeting is to track your spending. Compare your plan to your actual spending. If you are not within your budget, you either need to adjust the budget to be more realistic or to control your spending in that area more closely.

References

• Merriam-Webster: Budget
• CNN Money: Money 101 Lesson 2: Making a Budget