Budget

A budget is a financial plan that outlines the projected income and anticipated expenses used as a roadmap for an individual or an organization for a specified period. Budgets help ensure that essential expenses are covered while promoting responsible spending on remaining income.

Budget Deficit Definition

A budget deficit is when there are more expenses than income in a given period of time. This term primarily applies to government spending and serves as an indicator, albeit imperfect, of the overall financial health of a country.

Budget Surplus Definition

A budget surplus is when the income, or tax revenue, of an organization or country surpasses the expenditure during a designated period. It signifies that the entity generated more revenue than it spent, resulting in a positive financial balance.

What is a Zero-Based Budget?

A zero-based budget is a budgeting plan in which every expense must be justified and approved for the new period. Unlike traditional budgets that base allocations on previous periods, a zero-based budget starts afresh with zero funds allocated initially. This method ensures that every dollar spent is thoroughly scrutinized and allocated efficiently, aligning expenditures with the organization's goals and objectives.

What Is a Balanced Budget?

A balanced budget is one in which the total expected income equals or is greater than the total expected expenses. This is usually a sign of a financially responsible entity.

What Is the Purpose of a Budget?

The purpose of a budget is to plan for your financial goals and ensure that your income is being spent in the most useful way.

Budget Variance Definition

Budget variance is the difference between the expenses, income, or revenue used in the budget and the actual expenses, income, or revenue. Budget variance can be positive or negative depending on whether the income or expenses were higher or lower than expected.

What Is the Best Way to Create a Budget?

The optimal approach to creating a personal budget involves several key steps. First, it is crucial to gain a clear understanding of your gross income (total earnings before deductions) and net income (income after taxes and other deductions). This distinction provides a realistic view of the funds available for budgeting purposes. One primary focus when creating a budget should be prioritizing savings. It is recommended to allocate your savings into three distinct categories – short-term, mid-term, and long-term – based on the anticipated time frame for needing the funds. This enables you to effectively plan for various financial goals and contingencies.

Additionally, it is important to prioritize expenses such as rent or mortgage payments. As a general guideline, it is advisable to ensure that your rent or mortgage does not exceed 25% of your income. However, this percentage can vary depending on individual circumstances. It is also essential to consider other recurring expenses including utilities, Wi-Fi, parking fees, and renters or homeowners' insurance. These costs should be factored in to accurately determine your overall financial obligations.

Another critical aspect of budgeting is to allocate funds for specific categories of expenditure. This includes setting ideal spending limits for transportation, groceries, and dining out. By establishing realistic budgets for these areas, you can better manage your finances and ensure that your spending aligns with your financial goals.

Learn more about creating a budget in your 20s here. If you’re just starting out with saving and investing, read more about financial skills for beginner investors.