A budget is a financial plan that helps individuals, businesses and government organizations control costs, manage spending, plan savings, and minimize debt. It also supports financial planning and accountability by establishing clear guidelines for how money is to be used. Budgets are used by people at every income level because they make it easy to see where your money is going and identify areas where you can cut back on unnecessary expenses.
The first step in making a personal budget is to calculate your monthly income. This includes any regular income you receive, such as wages or Social Security benefits, and any other regular sources of revenue like investments or rental property income. Then add up your monthly fixed expenses, which include payments for things that stay the same each month like mortgage or rent, cell phone service, garbage service and utilities. This is a good time to look at past credit card or bank statements to help you accurately estimate these amounts.
Next, identify your variable expenses that change from month to month such as groceries, clothing, eating out, entertainment and gas. Some families split these up into needs and wants (for example, gas is a need while music streaming services are a want), but others find it easier to lump these together and consider how they can save money by changing their habits.
Finally, add up any debt payments you have, including your credit card balances and loan repayments. This is a good time to prioritize these and decide how much you need to pay each month. Once you have all your numbers, subtract your expenses from your income to determine your net monthly cash flow.
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