What is a budget?
Photo by: adamjinj
I enjoy reading and spend a decent amount of time each week reading blogs on my blogroll, new blogs I find through pfblogs.org and major news sites such as MSN Money Central and CNN Money. I also really enjoy reading the various comments people make about the articles, almost more so than the articles themselves sometimes. One of the interesting trends I have picked up on is that I’m not convinced people truely understand what a budget really is.
What is a budget?
According to Wikipedia, a budget is:
Budget (from french bougette, purse) generally refers to a list of all planned expenses and revenues.
Not a very good definition from perspective, so let me give it a try:
A budget is a financial tool that provides detailed tracking and monitoring of expenses. Expenses are capped to avoid spending more money than is available and/or to provide better utilization of available funds.
I’m not near the word smith that the writers of Webster’s or Wikipedia are, but I think my definition is a fair and accurate take on what a budget really is.
A Financial Tool
A budget is only a tool and one of many tools available to assist with managing and tracking our money. In and of itself, it has no power, no control, nor can it solve your financial problems. Yet coupled with a plan and used effectively, a budget is a powerful means to completely turning around your financial life. I say this from my own personal experience.
We use various monitors in our lives everyday. If you are a diabetic, you check your insulin levels, if you drive a car, you use a speedometer to avoid getting a speeding ticket, if you own a home, chances are you have a home alarm system. Various monitors and tracking devices are all around around us.
A budget is simply a monitor or tracking device for our finances. A budget provides us, at a quick glance, with a perspective on how we’re doing with our money. It serves as a speedometer to keep us from going over our “spending limit” and serves as an alarm to let us know when we’ve reached or surpassed that limit.
Contrary to popular belief, a budget is simple. It literally takes a few minutes to create and a few minutes daily to update and track. To create one, grab a sheet of paper and list off your source of income. Next, list off all of your planned expenses for the coming month. Subtract the total expenses from the total income. If the number is positive, congratulations you have some extra money to save or pay down your debt. If the number is negative, you’ll need to trim your expenses as you are spending more money than you have. If the number is zero, congrats you’re done.
Congratulations, you just created a budget. Now all you have to do is track your spending, and insure you don’t spend more than you’ve allocated in your budget.
Not a control tool
Probably the most common myths about a budget is that it’s controlling. In my experience, it doesn’t control, but provides an incredible sense of relief and comfort.
Have you ever experienced that sense of fear while waiting for the ATM to dispense your cash that it might say “Insufficient funds?” or maybe you’ve just spent the last hour grocery shopping. You swiped your debit card and are afraid the death the cashier is going to say “Sorry, the transaction was declined.”
Moments like those are stressful and I’ll be honest, I’ve had far too many of those in my past. Creating and following a budget eliminates these fears. You no longer have to worry if you have the money or not, as you budget let’s you know exactly how much you have to spend.
More out of what you have
One of the more recent things I’ve learned about our budget is that it helps us make more effective use of our money. We work hard to find creative ways to trim our expenses and increase our income. Each time we reduce an expense or increase an income, we free up money that can be used for other things like snow flaking against our debt, saving, and investing. A budget truely helps you make the best use out of the income you have and that in and off itself is a powerful concept.
While a simple sheet of paper is a simple and easy way to get started budgeting, it can become tedious. As a huge fan of automating my finances, I prefer using software to manage my budget. Here are just a few of the available options:
You Need A Budget – My personal favorite budgeting software and the one I currently use. You can read my full review here.
Mvelopes – An online budgeting package that uses the envelope method of budgeting. Excellent package and highly recommended.
Gazelle Budget – A very simple online budgeting tool brought to you by the king of budgets, Dave Ramsey.
Spreadsheet – The most popular budgeting tool of all, the spreadsheet. Many people use Microsoft Excel or Google Spreadsheet.
Don’t have a budget? Try it for a month, chances are you’ll stick with it. Do you budget? If so, how and why? If not, how come? Share your thoughts on budgeting, add a comment!