A budget is essentially a working document that summarizes the total income that will be received by the person or company along with the total expenditures that will be – or should be – made during a certain period.
After a budget is drafted, the result should be either a deficit or a surplus depending on whether expenditures outpaced the amount received as income or if the opposite occurred.
Positive excess funds can be used for multiple purposes, depending on the financial goals of the individual or household, which can make every dollar a very powerful tool to boost someone’s finances or stability over time.
Although budgets seem like a fairly easy-to-build financial tool, a significant number of individuals and households complain that they were unable to achieve their financial goals, although most of them indicate that they do have a budget.
This is reflected by a recent survey from Debt.com, which found that in 2019 the percentage of households that were ‘on a budget’ was 67%.
On the other hand, a contrasting survey from the Certified Financial Planner Board of Standards (CFP Board) found that as many as 59% of the Americans they polled said they were not tracking their expenditures.
The truth is that the definition of a budget played a key role in this disparity since as many as 43% of the individuals surveyed believed that they had a budget – although they didn’t have an actual system that tracked their expenditures per category or way to check their progress towards a goal.
That realization, according to business consultant Jasdeep Singh, points to the fact that the number one mistake people make when budgeting is not that they fail to meet their goals, but that the true issue is that many people don’t know what a budget really is.
For that reason, the following article explains the key elements that a budget should have and how you can quickly build one for you and your family.
The key elements of a budget
A budget should have the following elements to be considered reliable:
- A monthly (or even weekly) income row that shows how much you will be receiving – net of any mandatory payroll deductions. This income should be broken down in detail if you have multiple income sources.
- Total monthly expenditures broken down per broad category such as housing, debt service, utilities, schooling, groceries, maintenance expenditures, clothing, etc.
- Both income and expenditures should be totalized and the net result from both items will result in either a deficit or a surplus.
- It is also useful to calculate the percentage that each category represents from the total income – such as 10% spent on housing, 12% on debt service, etc.
Now that you have established a simple structure for the budget, the first important task is to add a section in which you can track your actual expenditures so you can compare, once the month is over, if you have spent more or less than what you initially planned.
The key to the whole process, as you work to reduce expenses, is to plan for what to do with “surplus” money. The surplus is in quotes because the purpose of the budget is to get to be able to determine the destination of money in excess of the necessary expenses you need to live. Basically, the money that will start you on your financial growth journey.
In this regard, Dr. Singh, who holds a Master in Business Administration from the University of Connecticut, recommends that households set one of these six goals to avoid any deviations from your goals. While each individual and family will have different priorities, the six goals are laid out in a general form from highest to lowest priority.
These goals are:
- Build a retirement fund.
- Pay off expensive or excessive debt.
- Build an emergency fund comprised of at least three months’ worth of salary.
- Build a fund for your kid’s college expenditures.
- Plan for vacations and other “want” items/experiences that made budgeting feel worthwhile.
- Buy real estate.
By establishing these goals, it will be easier, if not even automatic through your bank, to allocate funds above your expenses and reach meaningful financial milestones.
Bottom line
If you already have a budget that is great news, and you are off to a good start when it comes to managing your finances.
However, make sure your definition of a budget is actually what it should be, as you could be making a big mistake if you think keeping a budget is just tracking how much you spent each month based on your bank statements.
Story by Riley Cooper