Budget

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What does 'Budget' mean

 

A budget is an estimation of revenue and expenses over a specified future period of time; it is compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a family, a group of people, a business, a government, a country, a multinational organization or just about anything else that makes and spends money. Among companies and organizations, a budget is an internal tool used by management and is often not required for reporting by external parties.

BREAKING DOWN 'Budget'

Basically, a budget is a microeconomic concept that shows the tradeoff made when one good is exchanged for another. In terms of the bottom line – the end result of this tradeoff – a surplus budget means profits are anticipated, a balanced budget means that revenues are expected to equal expenses, and a deficit budget means expenses will exceed revenues.

Corporate Budget

Budgets are an integral part of running any business efficiently and effectively.

Budget Development Process

The process begins by establishing assumptions for the upcoming budget period. These assumptions are related to projected sales trends, cost trends and the overall economic outlook of the market or industry sector. Specific factors affecting potential expenses are addressed and monitored. The budget is published in a packet that outlines the standards and procedures used to develop it: the assumptions about the markets, key relationships with vendors that provide discounts and explanations of how certain calculations were made.

The sales budget is often the first to be developed, as subsequent expense budgets cannot be established without knowing the future cash flows. Budgets are developed for all the different subsidiaries, divisions and departments within an organization. For a manufacturer, a separate budget is often developed for direct materials, labor and overhead.

All budgets get rolled up into the master budget, which also includes budgeted financial statements, forecasts of cash inflows and outflows, and an overall financing plan. Top management reviews the budget and submits it for approval to the board of directors.

Static Vs. Flexible Budgets

There are two major types of budgets: static budgets and flexible budgets. A static budget remains unchanged over the life of the budget. Regardless of changes that occur during the budgeting period, all accounts and figures remain the same as they were originally calculated.

Alternatively, a flexible budget has a relational value to certain variables. The dollar amounts listed on a flexible budget change based on sales levels, production levels or other external economic factors.

Both types of budgets are useful to management. A static budget evaluates the effectiveness of the original budgeting process, while a flexible budget provides deeper insight into business operations.

 

 

Personal Budgets

Individuals and families have budgets too, of course – or they should have. Creating and using a budget is not just for those who need to closely monitor their cash flows from month to month because "money is tight"; it's a valuable tool for all demographics. Almost everyone, even those with large paychecks and plenty of money in the bank, can benefit from budgeting.

Even though budgeting is a wonderful tool for managing your finances, many people still think it's not for them. Below is a list of budget myths – the erroneous logic that stops people from keeping track of their finances, and allocating money in the best way.

1. I Don't Need to Budget

Having a handle on your monthly income and expenses allows you to make sure your hard-earned money is being put to its highest and best purpose. For those who enjoy an income that covers all bills with money left over, it can help maximize savings and investments. If one's monthly expenses typically consume up the lion's share of net income, any budget should focus on identifying and classifying all the expenses that occur during the month, quarter and year. And for people whose cash flow is tight, it can be crucial for identifying expenses that could be reduced or cut, and minimizing any wasteful interest being paid on credit cards or other debt.

2. I'm Not Good at Math

Thanks to budgeting software, you don't have to be; you simply have to be able to follow instructions. Many of these programs are free and can be safely downloaded without fear of viruses or spyware. If you know how to use spreadsheet software, you can even make your own ledger. It's as simple as creating one column for your income, another column for your expenses and keeping a running tab on the difference between the two.

3. My Job Is Secure…

No one's job is truly safe. If you work for a corporation, being laid off due to downsizing or a takeover is always a possibility. If you work for a small company, it could die with its owner, be bought out, or just fold. You should always be prepared for a job loss by having at least three months' worth of living expenses in the bank. It's a lot easier to accumulate this money if you know how much you're bringing in and laying out each month.

4.  …And If It's Not, Unemployment Insurance Will Tide Me Over

Unemployment compensation is not a sure thing. Let's say a bad situation at work leaves you with no choice but to quit your job. Unless you can prove constructive discharge (that is, you were virtually forced to resign), your departure will be considered voluntary, making you ineligible for unemployment insurance. Besides, the benefits may well fall short of the wages you're used to: for most states, they average between $300 to $500 per week.

5. I Don't Want to Deprive Myself

Budgeting is not synonymous with spending as little money as possible or making yourself feel guilty about every purchase. The crux of budgeting is to make sure you're able to save a little each month, ideally at least 10% of your income, or at the very least, to make sure that you aren't spending more than you earn. Unless you're on a very tight budget (and we all are sometimes), you'll still be able to buy baseball tickets and go out to eat. Tracking your expenses doesn't change the amount of money you have available to spend every month, it just tells you where that money is going.

6. I Don't Want Anything Big

This one is tricky. If you don't have any major savings goals (buying a house, starting your own business), it's hard to drum up the motivation to stash away extra cash each month. However, your situation and your attitudes are likely to change over time. Perhaps you don't want to save up for a house because you live in New York City and expect that renting will be the most affordable option for the rest of your life. But in five years, you might be sick of the Big Apple and decide to move to rural Vermont. Suddenly, buying a home becomes more affordable and you might wish you had five years' worth of savings in the bank for a down payment.

7. I Won't Qualify for Student Financial Aid

Yes, the Catch-22 of student financial aid is that the more money you have, the less you'll be eligible for. That's enough to make anyone wonder if it isn't better to just spend it all and have nothing in the bank in order to qualify for the maximum amount of grants and loans.

But that catch mainly applies to earned income. Whether you are an adult student going back to school or the parent of a student headed to college, the Free Application for Federal Student Aid (FAFSA) form (used for Stafford Loans, Perkins Loans or Pell Grants), does not require you to report the value of your primary residence (if you own a home) or the value of your retirement accounts. This means that if you want to save money without compromising your financial aid eligibility, you can do so by using your savings to buy a house, prepay your mortgage or contribute more money to your retirement accounts. The savings you put into these assets can still be accessed in the event of an emergency, but you won't be penalized for them.

Another issue is that even if you employ all the legal strategies available to you to maximize your financial aid eligibility, you still won't always qualify for as much aid as you need, so it's not a bad idea to have your own source of funds to make up for any shortfall.

8. I'm Debt-Free

Good for you! But it won't pay your bills in an emergency. A zero balance can quickly become a negative balance if you don't have a safety net.

9. I Always Get a Raise or Tax Refund

It's never a good idea to count on unpredictable sources of income. This may be the year your company may not have enough money to give you a raise, or as much of a raise as you'd hoped for, even if you've earned it. The same is true of bonus money. Tax refunds are more reliable, but this depends in part on how good you are at calculating your own tax liability. Some people know how to figure to the penny how much of a refund they will get (or how much they will owe) as well as how to adjust this figure through changes in payroll withholding throughout the year; even so, changes in tax deductions, IRS regulations or other life events can mean a nasty surprise on your tax return come April 15.

10. I Just Don't Have the Discipline

If you're still not convinced that budgeting is for you, here's a way to protect yourself from your own spending habits. Set up an automatic transfer from your checking account to a savings account you won't see (i.e., at a different bank), scheduled to happen right after you get paid. If you are saving for retirement, you may have the option of contributing a regular, set amount to a 401(k) or other retirement savings plan. This way, you'll always pay yourself first, you'll always have enough money for the transfer and you'll always pay yourself the same predetermined amount that you know will help you meet your goals. 

Building A Budget: A Novel Approach

In general, traditional budgeting starts with tracking expenses, eliminating debt and, once the budget is balanced, building an emergency fund. But to speed up the process, you could start by building a partial emergency fund. This emergency fund acts as a buffer as the rest of the budget is put in place, and should replace the use of credit cards for emergency situations. The key is to build the fund at regular intervals, consistently devoting a certain percentage of each paycheck toward it and, if possible, putting in whatever you can spare on top. This will get you to think about your spending, too.

What's an Emergency?

Here's where it can get a little trickier. You should only use the emergency money for true emergencies: like when you drive to work but your muffler stays at home, or your water heater starts to hiss and spit green bile like Linda Blair in The Exorcist.  It may help to keep the account at another bank (as mentioned above) or, better yet, an online savings account, where you can't access the money as easily and where it will earn higher interest than a normal savings account.

While it's true that you would save money if you used your emergency fund to eliminate credit card debt, the purpose of the fund is to prevent you from having to use your credit card for paying for the ugly things that life throws at you. With a proper emergency fund, you will not need your credit card to float you when something goes wrong.

Downsize and Substitute

Now that you have a buffer between you and more high-interest debt, it is time to start the process of downsizing. The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest.

This can be a process of substitution as much as elimination. For example, if you have a per-month gym membership, cancel it: Use half of the money you save to invest or pay off outstanding debts, and save the other half to begin building a home gym in your basement. Instead of buying coffee from a fancy coffee shop every morning, invest in a coffee maker with a grinder and make your own, saving more money over the long term. Although eliminating expenses entirely is the fastest way to a solid budget, substitution tends to have more lasting effects. People often cut too deep and end up making a budget that they can't keep because it feels like they are giving up everything. Substitution, in contrast, keeps the basics while cutting down the costs.

Find New Sources of Income

Why isn't this the first step? If you simply increase your income without a budget to handle the extra cash properly, the gains tend to slip through the cracks and vanish. Once you have your budget in place and have more money coming in than going out (along with the buffer of an emergency fund), you can start investing to create more income. It is better to have no debt before you begin investing. If you are young, however, the rewards of investing higher-risk, high-return vehicles like stocks can outweigh most low-interest debt over time.

Sticking to a Budget

OK, you understand the finer points of budgeting,now. You've accomplished all of the above, even put together a nice spreadsheet that lays out your budget for the next 15 years. The only problem is that sticking to that budget isn't as easy you thought. That credit card still calls your name, and your "clothes" category seems awfully small and you just feel deprived. Budgets, you decide, are no fun.

The good news is you don't have to throw it all out the window, just because you've messed up a time or two. Here are some mental and physical tricks to ensure that budget sticks.

Remember the Big Picture

The point of the budget is to keep you out of overwhelming debt and help you build a financial future that will give you more freedom, not less. So think about how you want your future to be and remember that keeping to your budget will help you get there. Adding to your debt load, on the other hand, will mean that your future could be even tighter.

Remove the Options That Allow You to Cheat on Your Budget

Availability is your enemy. Make it more difficult on yourself to make impulse purchases; in other words, set up barriers so you have time to stop and think: "Is this purchase necessary?" Take yourself off retailer email lists; clear out your stored payment information on your favorite online shops so you can't just click to order.

Find Some Support

If you feel like you're the only one in your group who is on a budget, do a little looking and find some like-minded folk. It could be an online forum, a monthly meeting or even just a couple of friends who are traveling the same budgetary road. You need to know you're not the only person setting sane financial limits for yourself. You can also have accountability with your frugal buddies, talking things over and each other out of temptation.

Go Old School

There's something powerful about handing over a stack of 20-dollar bills for a purchase; it causes you to really think about the amount of money you're about to spend. Swiping a debit card, on the other hand, doesn't feel nearly as "real." Similarly, paying bills by writing checks and promptly entering the sums into your register keeps you up-to-date on how your account's being affected, in a way that auto-pay doesn't. We're not saying use cash exclusively or completely forgo online payments; but handling transactions in the old-fashioned ways can bring home to you how much you're spending and can enhance the power of self-regulation.

Reward Yourself

If you are constantly looking at what you have to cut and give up, the very act of budgeting will become distasteful. A mixture of long- and short-term gifts to yourself will help keep you motivated. When you've been faithful to your budget for a month, give yourself a reward. Even small ones can help (a night out with friends, a concert, a little extra cash for spending or something totally different). Keep visual reminders of these rewards, or things you're saving up for, front and center. Start building associations in your brain – that sticking to your budget has a pleasurable result.

Schedule a Periodic Budget Evaluation

It's difficult to predict how much money you'll need in every category of life; a new job may necessitate a wardrobe change and your clothing budget just isn't going to cut it. That's why it's important to have a regular check on how you've created your budget. If it isn't working, then tweak it. It is your budget, after all; just make sure that you keep your long-term financial goals in the picture.

Educate Yourself

Instead of taking the more common road of instant gratification, which leads so easily to overspending and endless debt, learn all you can about finances, money management, and how you can best invest in yourself. Talk to your financially savvy friends; get real-world tips and advice from people who are doing well with their money. The more you learn about handling money wisely and the rewards for doing so, the more concrete the reasons for budgeting will be, and the better you will be at not only creating a budget that works for you, but also sticking to it.

Ways To Budget When You're Broke

 
All these strategies sound fine – but you're in some dire straits financially, suffering from mounting bills and a lack of funds to pay them with, here are some steps to take.
1. Avoid Immediate Disaster

Don't be afraid to request bill extensions or payment plans from creditors. Skipping or delaying payments will only worsen your debt, and besides, late fees will ding your credit score. Requests are often granted.

2. Prioritize Bills

Go over all your bills to see what must be paid first and then set up a payment schedule based on your pay days. You will want to leave yourself some catch-up time if some of your bills are already late. If this is the case, call the bill companies to see how much you can pay now to get back on track toward positive status. Tell them you are taking strict measures to catch up. Be honest about what you can afford to pay; don't just promise to pay the full amount later, tempting as that may be.

3. Ignore the 10% Savings Rule

Stashing 10% of your income into your savings account is daunting when you're living paycheck to paycheck. It doesn't make sense to have $100 in a savings plan if you are fending off debt collectors. Your piggy bank will have to starve until you can find financial stability.

4. Review Spending

To fix your finances, you need to get a handle on your outlay first. Online banking and online budgeting software can help you categorize spending so you can make adjustments. Many people find that just by looking at aggregate figures for discretionary expenses, they are spurred to change their patterns and reduce excessive spending.
 
5. Eliminate Unnecessary Expenses

Once you've gotten a sense of where the money goes, it's time to tighten up. All cutbacks should start with items you wouldn't miss or habits you should change anyway – like reducing your fresh food purchases if you find ingredients spoiling before you can eat them. Or eating at home more, instead of at restaurants.

Some expenses you shouldn't drop, but might be able to adjust – say, reducing your auto insurance rate by switching carriers.

6. Negotiate Credit Card Interest Rates

There are other proactive ways to reduce expenses. Those killer APRs on your credit cards aren't fixed in stone, for example. Call the card companies and ask for an interest rate reduction; if you have a good record, they may well grant it. Certainly, if you don't ask, you won't get. This won't lower your outstanding balance, of course, but it will keep it from mushrooming as fast.

7. Keep a Budget Journal

Once you've gone through these steps, monitor your progress for a few months. You can do this by writing everything you spend in a notebook, budgeting apps on your phone, or with that software you used in step 4 to review your spending. How you track your money isn't as important as how much you are tracking. Focus on ensuring that every cent is accounted for by dividing your expenses into categories. Fine-tune and adjust spending as needed after each month.

8. Seek New Income

For the time being, saving and investing money is out. But consider ways to increase earnings: working overtime, getting a second job, or picking up some freelance work.

The Bottom Line

To manage your monthly expenses, prepare for life's unpredictable events and be able to afford big-ticket items without going into debt, budgeting is important. Keeping track of how much you earn and spend doesn't have to be drudgery, doesn't require you to be good at math and doesn't mean you can't buy the things you want. It just means that you'll know where your money goes, you'll have greater control over your finances and you'll probably be able to sleep more soundly at night.

A budget isn't a prison cell to keep you away from your money. Rather, it's a tool you use to make sure your future is better – and, yes, richer – than your present.