What Is a Budget and Why Should I Use One?

Here we explore what a budget is, examine different types of common budgeting strategies, and offer simple steps that you can use to create your own personal budget.

What Is a Personal Budget?

A personal budget is simply a plan for how you will spend your money during a specified period of time – commonly one week or one month. A budget starts with your income, from which you then subtract your expected expenses. Depending on your particular budgeting strategy, you might list out each expense line by line, or you might choose to group them into broader categories to offer some flexibility.

Why Is a Budget Necessary?

A personal budget is an incredibly helpful tool for a number of reasons.

For starters, creating a budget requires you to confront your spending habits in order to identify where your money is going. While this can be uncomfortable for some of us, it can also be an eye-opening experience. If you don’t know where your money is going, it can be very difficult to make any progress towards your financial plans – whether you want to cut down on your spending, save for retirement, pay down debt, or something else.

Beyond this, a budget offers you a quick snapshot of your financial health. For example, if you create a budget and find that you have money left over after all of your expenses have been covered, that means you are living below your means, which presents some money that you can put to use elsewhere (such as savings, investing, or paying down debt). If your expenses use all of the money you’ve allotted, then you’re living within your means. And if your expenses are greater than the money you’ve allotted, then you’re living above your means and should find a way to cut back, or else you may find yourself relying on incurring debt to get by.

The fact is that a budget helps you to plan. By listing out your expenses for the week or for the month and understanding how much money you have left over, you will be better able to identify a cash flow problem ahead of time, which can help you avoid turning to debt like credit cards to cover your expenses.

(This article written by: Tim Stobierski)

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