Budget

Budget summary: 

• A personal budget is a plan for how you'll spend your income. 

• Budgets can include fixed expenses, which stay roughly the same, and variable expenses, which may be higher or lower from month to month.

• There are multiple ways to make a budget, including the 50/30/20 rule and the zero-based budget. 

Budget definition and meaning

A budget is a plan for how an individual (or business) spends and saves money over a set period. Monthly budgets track where your money goes for a single month. Annual budgets outline your expenses and savings for the year. 

When you budget, you decide what to do with each dollar that comes in. If you have debt, a budget can help you get your expenses under control. 

Key concept: A budget is your plan to manage your income and expenses.

More on budget

Life is less stressful when you know where your money goes each month. A budget is a simple way to stay on top of your finances. 

When you make a budget, you make decisions about where and how to spend the money that you have. You can make a budget on paper, in a spreadsheet, or with the help of a budget app—whatever fits you best. 

A budget helps you make sure the bills are paid, and it can also help you with other goals, like saving and debt repayment. 

Budget: a comprehensive breakdown

A budget is pretty simple when you get into the details. On one side, you have your income or the money that comes in. On the other side is the money that goes out to cover your expenses. Expenses can be fixed or variable.

• Fixed expenses show up in your budget month after month. They are the same amount and have the same due date every time. Examples of fixed expenses include rent or mortgage payments, insurance, and internet service. 

• Variable expenses can change from month to month based on how much you spend. For example, you might spend $500 on groceries one month and $700 the next. Other examples of variable expenses include clothes, personal care, and entertainment. 

Some expenses in your budget are necessary. For example, you need to pay rent or a mortgage so you have a place to live. Other expenses are discretionary. 

Discretionary expenses are things you spend money on that aren't necessary to live. So dinner out or a weekend trip would be discretionary since you choose to spend money on those things.

You can also have periodic expenses in a budget. These are expenses you pay less often. If you need to take your dog to the vet for an annual checkup, that's a periodic expense. You can still budget and save for it throughout the year, but you'll only pay that expense when it's time for the visit. 

Emergency expenses are expenses that aren't in your budget. A flat tire, a surprise home repair, or a trip to the ER for food poisoning are all examples of emergency or unplanned expenses. 

Types of budgets

The great thing about budgets is that you don't have to use them the same way as everyone else. You can pick a system that works for you. Here are some of the most popular types of budgets. 

50/30/20 budget

The 50/30/20 budget divides your income into three buckets: 

• 50% to needs

• 30% to wants

• 20% to savings

This budget system is super simple because it's easy to calculate how much goes into each budget. For example, if you have $5,000 a month in net income, you'd spend $2,500 on needs, $1,500 on wants, and save the other $1,000. 

Zero-based budget

A zero-based budget gives every dollar a job so there's no money left over. You can use a zero-based budget by itself or pair it up with the 50/30/20 budget. 

Let's assume you do that. If you have $2,500 for needs, you'd assign money from the bucket to each of your essential expenses until you get to $0. Then you'd repeat the process with the money you earmarked for wants and savings. 

The zero-based budget is designed so that no money falls through the cracks, and nothing gets wasted. 

Envelope budget

The envelope budget encourages you to cover expenses with cash vs. a debit card or credit card. 

You make a list of the expenses you want to pay in cash, then put that amount into envelopes for each expense. Once you spend all the money in your envelopes, you can't spend anything else until the next budget period starts. 

You might put $500 into your grocery envelope, $100 into an envelope for gas, and $50 in an envelope marked fun. This budget method encourages mindful spending since you have to be diligent about tracking how much you have left in your envelopes. 

Regardless of which budget method you use, what matters most is that you're committed to the process. It's easier to reach your goals when a budget is a regular part of your financial plan.