What is a budget?

 

When you think of the future, what do you think about? Do you want to purchase a new laptop or new car? Are you thinking about college expenses? How are you spending the money you earn from your part time job? Do you know where your money goes? Do you have any left over?

All of these questions need answers in order to properly chart our financial journey. In order to reach our purchasing goals we need to create a plan for spending and saving our money. This plan that we make is called a budget.

We must track exactly what goes in and comes out in order to create an effective budget.

 

Let's break this budget idea down a bit further by sharing the basic ingredients for a budget:

 

​Income - what you make 

Expenses - what you spend

 

Sounds simple enough, right? It is....or better yet, it can be. The hardest part of budgeting can be identifying all sources of these "ingredients".

 

Lets look at this example of a sample budget from HandsonBanking.org:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

We can see from her budget that Alex makes $20 per week from babysitting (income).

She has also listed what she spends and how much for each category (expenses).

 

Now lets use this information to make some financial decisions.

 

Alex wants to buy a pair of shoes. But they cost $45.99, not including tax.

Using Alex’s entertainment/clothing budget, how long will it take her to have earned enough money for the shoes?

 

Three months

 

Why?

 

Because the shoes cost $45.99, not including tax, the estimated cost is around $50.

If Alex sticks to her entertainment/clothing budget, she will save $20 each 4-week period.

That means Alex needs to save $20 every 4 weeks for approximately 3 months.

 

Lets try another

 

Alex has kept within her budget during this 4-week period. She also earned an extra $12 one week for cleaning the

neighbor’s garage. If Alex wants to save the $10 she has left over every 4-week period, how much less time will it take

for her to earn enough money for the shoes? Remember, the shoes cost $45.99 plus tax.

 

Two months

 

Why?

 

Because if Alex doesn’t use the $10 left over from his 4-week budget, she will have $20 to spend on shoes each month.

 

If she saves $20 each 4-week period, she will save for the shoes in 3 months.

If she earns an extra $12 in a 4-week period, she will earn $32 in this 4-week period.

$20 (4-week clothing budget) + $32 (amount budgeted + extra $12 earned) = $52

 

 

Are you beginning to see how important it is to keep a budget? And how important it is do your best to stick to it?

Its important to make good sound financial decisions, but even more important to have the information to make those kind of decisions.

A budget will provide you with the tools you need to make these decisions.

 

 

 

 

Ready to learn how to create a budget? Click here to see how.