budget

What Is a Budget?

5 Minute Read

We’re glad you asked! You’re taking the first step to financial peace, and we’re excited to teach you how to budget the right way.

The word “budget” has been known to make skin crawl, send shivers down spines, and even bring fully grown adults to tears. But it doesn’t have to be that way!

If you’ve done a budget in the past and had a less-than-stellar experience, we’re here to help. We’ll walk you through the process step by step and help make sure your budget doesn’t get the best of you.

Knowing What a Budget Is

A budget is simply an estimate of income and expenses for a set period of time with designated categories. While most budgets are similar, not all budgets are created equal. We recommend something called a zero-based budget.

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What Is a Zero-Based Budget?

The idea of a zero-based budget is simple: Income minus outgo equals zero. In other words, if you bring home $3,000 each month in income, you need to budget (aka plan) where that money is going to go. Now this doesn’t mean you have a bank account balance of zero—remember that. Instead, this means that by the time it’s payday, you’ve already told every little penny in that check exactly where it’s going to go.

Why Does a Budget Matter?

No matter what your end game is—getting out of debt, saving for your kid’s college fund, planning for retirement, paying off the mortgage, or investing—you need a budget. Tell your money where to go so that you can reach your goals, whatever they may be.

Want to be debt-free? Hoping to reach millionaire status one day? It all starts here. The budget is your key to making your financial goals a reality.

How Do I Make a Zero-Based Budget?

Making a zero-based budget isn’t as hard as it sounds.

Sit down, pour your favorite beverage, and make a list of all your sources of income for the month (take-home pay). Then list all your expenses for the month—start with the four walls (food, shelter and utilities, transportation and clothing). You want to make sure your rent or mortgage is budgeted for first before you start budgeting for your gym membership. Once that’s taken care of, list all your other expenses, like entertainment, date nights, and the shoes little Johnny needs for school.

Some expenses will occur every month (rent, utilities), and some will be one-time expenses (birthday gifts, special events, weddings). Adjust your budget each month and you’ll be set.

Just make sure every dollar has a name! That means you must have zero dollars left over at the end of the month. If you fill every item in your budget and come out $100 ahead (meaning you have nothing for that $100 to do), you haven’t finished your budget. Assign that remaining $100 a job. Maybe you use it to get a jump start on your debt snowball, add an extra buffer to your savings, or beef up your investment contributions. Consider where you are in the Baby Steps. Whatever you decide is up to you!

Don’t forget: You need to budget before each month starts. But don’t worry—it’ll get easier over time!

Busting Budget Myths

We know there are plenty of budget myths floating around out there. We’re here to shed some light on a few of them.

But I’m bad with math . . .

No problem! Lucky for you, it’s the 21st century and we don’t have to rely on pen and paper alone. Got a smartphone or a computer? Great! Download our free budgeting app EveryDollar. Don’t let plugging in a few numbers like your income and bill amounts scare you—EveryDollar crunches those for you! Math novices everywhere, rejoice!

But I don’t want to deprive myself from buying things that I want . . .

Okay. First, put aside the “I have to have it” attitude. As Dave would say, “Grow up.” Children want it now, but adults delay gratification. Second, don’t think a budget keeps you from spending your money. Having a budget actually gives you permission to spend. You won’t be depriving yourself—you’ll be telling yourself it’s okay to spend the money (that is, as long as it’s in the budget for the month.)

Having a budget actually gives you permission to spend.

But I’m doing pretty well for myself. Only less fortunate people have to do a budget . . .

Nope. Whether you have $100 to your name or you’re a millionaire, you need to tell your money where to go. And if you’re out of debt, your extra money could grow even more! Consider Baby Step 4 where you invest 15% of your household income into Roth IRAs and tax-advantaged retirement accounts.

Wherever you find yourself in the journey of life, you can never go wrong with having a budget.

Ditch the spreadsheets and switch to EveryDollar—the easiest way to keep tabs on your budget. Track it anytime for free from your computer or smartphone.

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