Everyone says you should have a budget, which is sound advice. However, if you’ve never had a budget, you may be unsure of how to budget, what it is and what it’s intended to do.

In this article, I’ll explain what a budget is, why you need one, and discuss some practical ideas that may be useful to you.

Part of the problem for many people may be that the phrase “budget” is used so frequently, and perhaps even arbitrarily.

Budgets, we’re always told, don’t work. After all, the federal government almost never balances its budget, and many firms routinely overspend.

So, what’s the sense of having a budget if it can fail?

What Exactly Is a Budget?

Part of the issue with budgeting is that the word “budget” has a highly clinical connotation. A budget, as defined by accounting, is both dry and impersonal.

A budget is an estimate of revenue and expense for a given future period of time that is usually compiled and re-evaluated on a regularly. Budgets can be established for an individual, a family, a group of individuals, a business, a government, a country, a global organization, or almost anything else that generates and spends money. A budget is a tool used by management in businesses and organizations, and it is not always required for external reporting.

Does that definition pique your interest? Neither do I. But that’s what you learn in school or read about in the business press. It’s a reasonable answer, but it doesn’t work on a human level.

So, instead of focusing on the organizational definition of “budget,” consider how it can relate to you personally.

Take Charge of Your Money

Budgeting is fundamentally about gaining control of your finances. A recent survey found that approximately 60% of Americans do not have $1,000 in savings for an emergency.

A budget is essential for avoiding living in such a financial situation. A budget is just a plan used to ensure that you spend less than you earn.

Individually, this could mean making $3,000 per month and living on $2,500. It’s not easy, but it’s the key to all excellent financial things in life.

What Is the Function of a Budget?

The basic goal of a budget is to obtain control of your financial condition. Living paycheck to paycheck, as most Americans do, is not only financially risky, but also extremely stressful. It’s one of the main reasons why stress appears to be more of a problem now than ever before.

There are numerous reasons for stress, but one of the most common is financial. The issue is that it is never-ending. It’s not just that you fall behind in one month; it’s an ongoing struggle each month. That can exhaust anyone.

How to Begin the Budgeting Procedure

A budget is essentially the equivalent of a financial pause. You’ll begin by conducting an in-depth study of your existing financial behavior. Mostly, it’s about determining how to spend the money you do have. Once you’ve done so, you’ll be in a better position to assess how you can improve your financial efficiency.

A nice budgeting word I heard is “creating margin in your finances.” Margin is the additional money in your budget, similar to the extra space that surrounds the content on a page of a book. You probably don’t have any financial buffer if you don’t have a budget. A budget’s objective is to give exactly that.

It’s unlikely you’ll ever make any progress on the money side of your life unless you create your own budget.

The Benefits and Drawbacks of Having a Budget

Most individuals focus on the negative aspects of budgeting, yet this is completely incorrect.

Budgeting’s Drawbacks:

• Changing your financial situation is always difficult. adjustments in your finances will inevitably result in adjustments in your lifestyle.
• Being able to live on less than you earn. If you’ve never done it before, that’s a difficult concept to grasp.
• Adopting the discipline of saying “no” to yourself and your family when you’re attempting to rationalize spending money on a “want” that you’re attempting to turn into a “need.”
• When you first adopt your budget, you may feel a sense of loss of independence.
• Learning to live without the small treats and indulgences you’ve been buying for yourself over the years.

If you only consider the downsides, you may never begin budgeting. That is why it is vital to focus on the positives instead.

The Benefits of Budgeting

• When you create a budget, you’ll gain control over your finances like you’ve never had before. It may be quite liberating.
• You’ll start accumulating savings, which will serve as real evidence of your increased financial control.
• If you were in debt when you started budgeting, your balances will start to drop, as will your credit card payments. You’ll begin to see that you can get out of debt.
• When your savings account reaches a comfortable level and your debts are nearly paid off, you can begin investing. That is when you will begin to accumulate wealth for the future.
• You’ll discover that your budget, as unpleasant as it may be, is giving you more options in life.
• Your stress level will decrease, allowing you to sleep better and feel better about yourself.
• As your financial condition improves, you’ll be able to indulge in some indulgences again, but this time without feeling guilty.

If you’ve been putting off starting a budget because of how horrible it will feel, shift your emphasis to how nice it will feel once it’s up and running. In other words, concentrate on the benefits at the end rather than the difficulties at the beginning.

No one reaches financial independence without putting in time and work, whether they win the lottery or receive a big sum of money. And believe me when I say that financial freedom is a desirable objective. But that will never happen unless you gain control of your finances.

What Are Three Budget Types?

There are more than three sorts of budgets, so many in fact that putting a number on it is probably impossible. Virtually anybody who understands anything about finance has released an ebook or online course to give you their version of the ultimate budget.

However, in my experience, three budget categories are the most productive and will work well for the majority of people.

50-20-30 Spending Plan

We’ll start with this one because it’s my favorite. The percentages of your net income allocated to general spending categories are represented by the numbers 50-20-30.

These are the classifications:

• Housing, utilities, minimum debt payments, food, insurance premiums, and other basic expenses consume 50% of your after-tax income.
• The remaining 20% is allocated for savings and/or debt repayment. It indicates payments made in excess of the minimum required monthly installments for debt repayment. The goal is to raise your payments in order to pay off your debts faster.
• 30% is allocated to “wants.” These are the things in life that you don’t need but buy because they make life more enjoyable. Vacations, entertainment, concert tickets, athletic events, and going to the movies all fall under this category. You get the idea.

The 50-20-30 budget appeals to me because of its emphasis on the broad picture. Most budgeting approaches concentrate on the finer points of budgeting, such as particular spending line items. Personal expenses aren’t as important with this strategy. For example, the 30% allocation to wants can be spent anyway you see fit. You may choose whatever joys in life you want to pay for without having to go on a financial diet.

This budget strategy also provides a great deal of flexibility. If you can’t cleanly fit your essentials into 50% of your after-tax income, you can shift part of your allocations from the wants area.

But what I enjoy best about the system is the emphasis on financial savings. Most people strive to save 10% or less of their earnings. That’s a step in the right direction, but in my experience, you’ll need to save much more to build wealth. The minimum in that direction is 20%.

The Envelope Method

Many people utilized this strategy as a common budgeting procedure long ago and far away, when individuals paid their bills in cash. It entailed putting actual money into individual envelopes for each household cost. It’s possible you have 15 to 20 cash-bearing envelopes to cover all of your expenses.

Although some people continue to manage their finances in this manner, the envelope approach has changed in recent decades.

Though many fewer individuals place cash in envelopes nowadays, the core procedure remains the same. You create a budget in which each item is represented by a “envelope” that must be filled with sufficient dollars to cover the expense. One advantage is that if you go over budget in one category, you can usually discover extra dollars in another that is lower than intended.

For what it’s worth, you don’t need to set up a physical envelope system any longer. You may do it digitally with envelope budgeting tools.

Zero-Based

If you follow the zero-based budget, your budget will zero out every month if you manage your money properly. This is due to the method’s requirement that you account for every dollar in your budget. Every money must be allocated to a specific expense, saved, or applied to debt reduction.

The zero-based budget is founded on the notion that any money in your budget that isn’t earmarked for a specific purpose is likely to be spent in excess. As a result, it is more limited than other budget categories. It’s excellent if you’ve had trouble keeping up with your finances in the past and lack the discipline to deal with unallocated monies.

The Value of Budgeting

Budget implementation does not have to be – and should not be – difficult and painful. Sure, there will be some sacrifice involved in the beginning. However, as time passes, it should get more comfortable. As time passes, you’ll feel more in charge of your finances.

A Parting Word from Jerome…

That is an important point in and of itself. The entire point of creating a budget is to make you the ruler of your money rather than allowing your money to dominate you. Even if you never intend to become wealthy, that is an admirable objective. But doing so will be even more crucial.

Financial independence is a worthwhile objective, as I’ve discovered in my own life. It’s not just about constantly accumulating more money; it’s about gaining gradually more control over your life.

A budget will help you get closer to living the life you’ve always wanted to live.