Budgeting

##What is a budget?

A budget is a plan that helps you manage your money. It shows you how much money you have, how much money you need to spend on different things, and how much money you can save or use for other goals. A budget can help you make smart decisions with your money and avoid problems like overspending, debt, or running out of money.

##Why do I need a budget?

Money is a limited resource, and you probably aren't able to buy everything you want or need with the money you have. It's important to prioritize your expenses and choose what is most important for you and your family. A budget can help!

###Track your income and expenses

Your income is the money you earn or receive from different sources, like your allowance, gifts, or jobs. Your expenses are the money you spend on different things, like food, clothes, bills, or entertainment. A budget can help you see how much money you have and where it goes every month.

###Set and achieve your goals

Your goals are the things you want to do or have with your money, like saving for a bike, a college fund, or a vacation. A budget can help you plan how much money you need and how long it will take to reach your goals. It can also help you adjust your spending habits to save more money for your goals.

###Avoid or reduce debt

Debt is the money you owe to someone else, like a bank, a store, or a friend. Debt can be a problem because it can cost you more money in interest and fees, damage your credit score, or cause stress and conflict with friends and family. A budget can help you avoid or reduce debt by helping you spend less than you earn, pay off your bills on time, and avoid borrowing money you don't have a clear plan for repaying.

##Budgeting: How do you start?

[[☃ image 7]]

Your budget needs to be something that you can look at and refer to frequently. There are multiple ways of building a budget, and you should pick the one you are most comfortable using:

• Pencil and paper: You can write down your income and expenses on a piece of paper, and subtract your expenses from your income to see how much money you have left. You can also divide your expenses into categories, such as needs, wants, and savings, and decide how much to spend on each one.

• Printable sheets on the internet: You can find many websites that offer free or cheap budget sheets that you can print and fill out. You can even download one here. These sheets may have different formats and features, such as charts, graphs, or tips, to help you organize your money and track your progress.

• Spreadsheet: You can use a computer program, such as Excel, Google Sheets, or Numbers, to create a budget spreadsheet. You can enter your income and expenses in different cells, and use formulas and functions to calculate and compare your numbers. You can also customize your spreadsheet with colors, fonts, and styles, and make changes easily.

• Apps: You can download apps on your phone or tablet that can help you create and manage your budget. Apps like Empower, YNAB, or Mobills can connect to your bank account, credit card, or other financial accounts, and automatically update your income and expenses. Some apps can also give you alerts, reminders, or suggestions, to help you stay on track and reach your goals.

##How do you build a budget?

Watch Sal build a budget using the 50/30/20 rule:

[[☃ video 1]]

The 50/30/20 rule divides your money into three categories: needs, wants, and savings.

The 50/30/20 rule suggests that you spend 50% of your income on your needs, 30% on your wants, and 20% on your savings. This way, you can balance your money and plan for your future.

##How do you use the 50/30/20 rule to build your budget?

To use the 50/30/20 rule to build your budget, you need to follow these steps:

###Step 1: Know your income

Your income is the money you earn or receive every month. It can come from a job, an allowance, a gift, or a scholarship. Add up all your income sources and write down the total amount. If your only income is your job, write down the amount you get paid each month. This is your starting point for your budget.

###Step 2: Calculate your needs budget

Your needs are the things you must have to live and be healthy. Examples include:

• Rent
• Utilities
• Food
• Transportation
• Insurance
• Basic clothing

To find out how much you can spend on your needs, multiply your income by $0.5$.

For example, if your income is $$2{,}000$, your needs budget is $$2{,}000 \times 0.5 = $1{,}000$ . This means you should try to keep your needs expenses below $$1{,}000$ every month.

###Step 3: Calculate your wants budget

Your wants are the things you like to have but don't really need. Examples include:

• Hobbies
• Entertainment
• Eating out
• Shopping
• Travel

To find out how much you can spend on your wants, multiply your income by $0.3$. For example, if your income is $$2{,}000$ , your wants budget is $$2,000 \times 0.3 = $600$. This means you can spend up to $$600$ on your wants every month.

###Step 4: Calculate your savings budget

Your savings are the money you put aside for your future goals. Examples include:

• Emergency fund
• Retirement account
• College fund
• Any other big purchase you are saving for

To find out how much you should save, multiply your income by $0.2$. For example, if your income is $$2{,}000$, your savings budget is $$2{,}000 \times 0.2 = $400$. This means you should save about $$400$ every month.

###Step 5: Write down your actual spending

Now that we have calculated our budget, let's start sorting our actual spending. Grab your latest bank statement, or log into your banking app, and start sorting your actual expenses. For example, if you see that you made a $$200$ payment towards your electric bill, write $$200$ under the "Needs" budget. If you see a charge for movie tickets, write that amount under "Wants" budget.

###Step 6: Compare your expenses to your budget

Subtract your expenses from your budget. This is your budget balance. If your budget balance is zero or positive, that means you are living within your means and have some extra money. If your budget balance is negative, that means you are spending more than you should and may have a budgeting problem.

###Step 7: Adjust your budget

If your budget balance is negative in any of the three categories, don't panic! Look at the other categories and see if there is money left in them, and use that extra money to balance or offset the negative balance.

If there is no extra money, you need to find ways to reduce your expenses or increase your income.

If your budget balance is positive, you can decide how to use your extra money. You can spend it on your wants, save it for your goals, or donate it to a cause.

##How do I balance a budget?

Having a negative balance in your budget means that the income you brought in was not enough the cover the expenses. To tackle this problem you can either try to increase your income or reduce your expenses. Even better if you can accomplish both.

##Increasing your income

Most often people think that the only way to increase an income is to find a better-paying job. That is most certainly the most common way, but other strategies can also help.
Here are some ways to increase your income:

• Ask for a raise or more hours at your current job.
• Look for extra jobs or chores that you can do for money, such as babysitting, mowing lawns, or selling crafts.
• Sell things you don't use or need anymore, such as clothes, books, or toys.
• Save your change and cash it in at a bank or a coin machine.
• Ask for money or gift cards as a gift for your birthday or other occasions.

##Decreasing expenses

When it comes to expenses, some expenses are easier to decrease than others. Expenses that are the same every month, such as your rent, car payment, insurance, or cell phone bill, are known as fixed expenses. These expenses are pre-determined by somebody other than yourself, like a bank or a company. Changing these expenses typically involves certain negotiations with the company or bank itself, and not all negotiations result in expense reduction.

Other expenses, such as some utilities, groceries, or shopping can vary from month-to-month, and are called variable expenses. You have a lot more control over these and they are much easier to decrease.

##Ways to save

Some ways to save money on expenses are:

• Compare prices and look for discounts or coupons before you buy something.
• Avoid impulse buying, which means buying things you don't need or didn't plan to buy.
• Use less water, electricity, and gas to lower your utility bills.
• Borrow, swap, or reuse items instead of buying new ones.
• Pack your lunch instead of buying it outside.
• Choose free or low-cost activities for fun, such as reading, playing games, or going to the park.

##Shifting the funds

A short term fix to a negative budget balance is to simply move funds from the budget balance that was positive into the negative one. For example, if your savings budget balance was negative, but your needs budget balance was positive, you can take the extra money from needs and move it onto savings. Note that this is only a short-term solution, and we should really try and figure out the cause of the negative balance.

Let's practice balancing a budget

Balancing a budget means making sure the money you spend and save matches what you earn. Sometimes, you’ll have extra money left at the end of the month. Great job! You can save that money to reach your [[☃ definition 1]] faster.

Other times, you might find you have spent more than your budget allows. The scenario below will guide you in how to balance a budget when that happens.

🧮 Scenario: Jordan’s monthly budget

Jordan earns $$800$ each month from a part‑time job while they attend college. Here’s how they planned to use it - and what they actually spent:

Item | Budgeted | Actual

• | -: | -:
  rent | $$400$ | $$400$
  utilities | $$60$ | $$90$
  groceries | $$90$ | $$90$
  eating out | $$100$ | $$140$
  entertainment | $$50$ | $$50$
  emergency savings | $$100$ | $$30$
  Total: | $\overline{$800}$ | $\overline{$800}$

If you look at the totals, Jordan’s budget looks fine. The total in the actual column matches the total in the budgeted column. That feels reassuring until you look a bit closer.

[[☃ graded-group 1]]

Between utilities and eating out, Jordan overspent by $$70$ this month, but “balanced” it by cutting the savings. In essence, Jordan borrowed money from themselves to pay for the overspending. [[☃ explanation 4]]

Adjustments

Jordan went over budget and used emergency savings to cover it, which left the savings $$70$ short. For next month, Jordan plans two changes:

1. ** $$70$ repayment to emergency savings**, and
2. adjustment to spending so the same problem doesn’t happen again

Utilities will likely stay around $$90$ because of the changing weather, so Jordan uses that amount to plan their budget below:

Item | Budgeted | Actual | Next month's budget

• | -: | -: | :-:
  rent | $$400$ | $$400$ | $$400$
  utilities | $$60$ | $$90$ | $\greenE{$90}$
  groceries | $$90$ | $$90$ | $$90$
  eating out | $$100$| $$140$ | $$100$
  entertainment | $$50$ | $$50$ | $$50$
  emergency savings | $$100$ | $$30$ | $$100$
  $\text\greenE{repay savings}$ | — | — | $\greenE{$70}$
  Total: | $\overline{$800}$ | $\overline{$800}$ | $\overline\orange{$900}$

Since Jordan increased the utilities budget and plans to repay their emergency savings, you can see that the new total is $\orange{$900}$. But Jordan only makes $$800$. How can Jordan make up the $$100$ difference?

Option A: Increase income

In the long term, Jordan could increase their income by finding a higher-paying job. That’s an ideal solution, but it’s not something most people can do right away. Since a new job and paycheck would take time, Jordan needs a quick solution for now.

[[☃ graded-group 1]]

Option B: Reduce expenses

Another option for Jordan is to spend less. They’ll need to decide which parts of the budget to shrink and which to keep the same.

• Needs like rent, utilities, and groceries are hard to cut.

• Wants like eating out and entertainment are easier to reduce—but Jordan still wants to enjoy themself next month.

[[☃ graded-group 1]]

[[☃ explanation 1]]

Jordan's balanced budget

After considering their options, Jordan decides to do both. They tutor some classmates for $$50$ and reduce their spending in eating out and entertainment for the next month.

Here's what Jordan's new budget looks like:

Item | Budget

• | -:
  rent | $$400$
  utilities | $$90$
  groceries | $$90$
  eating out | $$70$
  entertainment | $$30$
  emergency savings | $$100$
  repay savings | $$70$
  Total: | $\overline{$850}$

Final note

Balancing a budget usually isn't about finding one “perfect” fix. Sometimes that means spending less, other times earning more, or even adjusting goals for a while. The key is to find the right mix of these strategies for each situation.