What is a budget?
A budget is a plan for your money. It compares income (money in) with expenses (money out) so you can make choices before you spend.
Income − Expenses = Surplus (if positive) or Deficit (if negative)
Types of expenses
| Type | Description | Examples |
|---|---|---|
| Fixed expenses | same each month | rent, phone plan, insurance, loan payments |
| Variable expenses | change month to month | groceries, gas, entertainment, clothing |
| Periodic | occasional | car repairs, gifts, annual fees |
Needs vs wants
- Needs: housing, food, transportation, basic clothing
- Wants: streaming services, eating out, new gadgets
Cutting wants is usually the first step to balancing a budget.
The 50/30/20 guideline
A popular starting point (not a strict rule):
| Category | Share of take-home pay |
|---|---|
| Needs | 50% |
| Wants | 30% |
| Savings and debt repayment | 20% |
Example: Net income $2,800/month → $1,400 needs, $840 wants, $560 savings.
Sample monthly budget
| Item | Amount |
|---|---|
| Income (net) | $3,200 |
| Rent | $1,300 |
| Utilities | $120 |
| Phone | $55 |
| Transit pass | $156 |
| Groceries | $450 |
| Entertainment | $200 |
| Clothing | $100 |
| Savings | $500 |
| Total expenses | $2,881 |
| Surplus | $319 |
Fixing a deficit
If expenses exceed income (a deficit):
- Cut or reduce wants.
- Find cheaper options (a different phone plan, cooking at home).
- Increase income (extra shifts, a side job).
- Avoid covering it with credit cards, which adds interest.
Emergency fund
Financial planners often suggest saving 3 to 6 months of expenses for emergencies like job loss or repairs.
Using spreadsheets
A spreadsheet can total expenses automatically (=SUM) and show the surplus (=income − total). Charts show where money goes.
Worked examples
Example 1: Income $2,500; expenses $2,650. Result? Deficit of $150.
Example 2: What percent of $3,200 is rent of $1,300? ≈ 40.6%.
Example 3: Using 50/30/20 on $2,000, how much for savings? $400.
Common mistakes
- Budgeting with gross pay instead of net.
- Forgetting periodic expenses.
- Not tracking actual spending to compare with the plan.
Try it yourself
- Classify: rent, groceries, gym membership, gas.
- Income $1,900, expenses $1,750. Surplus or deficit?
- Use 50/30/20 on $3,600.
- Monthly expenses are $2,400. Emergency fund for 3 months?
Answers: 1) fixed, variable, fixed, variable 2) $150 surplus 3) $1,800 / $1,080 / $720 4) $7,200
Quick recap
- A budget compares income and expenses.
- Know your fixed expenses and variable expenses; separate needs and wants.
- Aim for a surplus; fix a deficit by cutting wants or raising income.