What Is a Balanced Budget?

Part of creating a balanced budget involves adding up how much you spend.

A balanced budget ensures that expenditures do not exceed the amount of money coming in, either as revenue or income. A budget is often used in financial planning to help people get their spending under control and to create saving and investing goals.

Budgeting

Budgeting is the process of recording, monitoring and projecting income and expenses. It is a control mechanism whereby a review of past income and expenditures can help to determine where adjustments need to be made in spending. It may be used for a business, government, household or individual. The main purpose is to create a balanced budget.

Definition of a Balanced Budget

A balanced budget is one in which the expenditures do not exceed the revenue or income that is earned. The revenue and income can be exactly equal or greater than the expenses incurred in any given period. If they are not, adjustments need to be made moving forward to correct this so as to avoid unnecessary debts.

Steps to Create a Budget

After completing the current year's income and expense statement, it should be easy to create some financial goals related to next year's spending.

To create a personal budget, begin by gathering all bank and credit card statements, plus checks and check stubs, for the past 12 months. Create a list of all income sources and amounts, plus a list of all expenses by category. A spreadsheet is a good way to do this. After completion, analyze where money is being spent and if it is necessary. Check to see if the budget was balanced (income was greater than or equal to expenses).

Forecasting and Projecting For the Upcoming Year

Budgeting is a continuous process that is used to accomplish a reduction in spending or an increase in saving.

Once the current year's list is complete, it is time to create a budget for the upcoming year. This can be done on a monthly or annual basis. When beginning, monthly projections are usually easier and the more frequent monitoring helps to reach goals. List all of the bills that will have to be paid, plus include categories for food, entertainment and any other purchases that may occur. If it is foreseen that an expense will increase, this needs to be included. Every month or year, do a comparison of spending to what was budgeted.

References

• "Personal Financial Planning, Theory and Practice"; Kaplan Schweser; 2009

Resources

• Microsoft Office: Home Budget Templates