Why You Need to Learn How to Budget

A budget estimates revenue and expenses over a specified future period utilized by governments,  businesses, and individuals. Budgeting should be something that everyone does, regardless of their financial situation. A budget is usually compiled and re-evaluated periodically. Budgeting can be made for a person, a group of people, a business, a government, or anything else that makes and spends money. The importance of budgeting cannot be understated. According to Derek Notman’s explanation, a budget, also known as cash flow, is arguably more important than the cash you have in your bank and investment accounts. Your cash flow allows you to pay for everything (or not). Without knowing your cash flow, you could be putting yourself into a bad financial situation and not even know it. You can only get by without knowing your cash flow for so long before you get into financial trouble, so make the time you see the flow of your cash.  

Budget Types

Based on Akhilesh Ganti’s explanation, we have three kinds of budgets. A budget is a  microeconomic concept that shows the trade-off made when one good is exchanged for another. In terms of the bottom line or the result of this trade-off, a surplus budget means profits are anticipated. A balanced budget means revenues are expected to equal expenses. A deficit budget means expenses will exceed revenues.  

Surplus Budget 

A budget surplus occurs when income exceeds expenditures. The term often refers to a government’s financial state, as individuals have savings rather than a budget surplus. A surplus is an indication that a government’s finances are being effectively managed. A budget surplus might be used to purchase, pay off debt or save for the future. A city government with a budget surplus may use the money to make improvements, such as revitalizing a decaying park or downtown area.  

Balanced Budget  

A balanced budget is a situation in financial planning or the budgeting process where total expected revenues are equal to total planned spending. This term is most frequently applied to public sector  (government) budgeting. A budget can also be considered balanced after an entire year’s revenues and expenses have been incurred and recorded. The term ‘balanced budget’ is commonly used in official government budgets. For example, governments may issue a press release stating that they have a balanced budget for the upcoming fiscal year, or politicians may campaign on a promise to balance the budget once in office.  

Deficit Budget  

A budget deficit occurs when expenses exceed revenue, indicating a country’s financial health. The government generally uses the term ‘budget deficit’ when referring to accrued deficits form national debt rather than businesses or individuals. In cases where a budget deficit is identified, current expenses exceed the income received through standard operations. A nation wishing to correct its budget deficit may need to cut back on certain expenditures, increase revenue-generating activities, or employ a combination of the two.  

Building a Budget  

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

Tips for your budgeting:  

– You should only use the emergency money for emergencies.

– The more space you can create between your expenses and your income, the more income you will have to pay down debt and invest. 

– Find a new source of income.

– Stick to the budget.

– Remove the options that allow you to cheat financially.

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. So think about how you want your future to be and remember that keeping to your budget will help you get there.  

Photo: Oleksandra Klestova/Shutterstock

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