How to budget and what is a budget?

A budget is an estimate of income and expenses for a set period of time.

To budget means to organize your finances in such a way that you manage to save up rather than owe more money.

Budgeting is not complex, but requires time and organization. It is a very important skill for everyone, especially for those with fixed income (the same income every two weeks). You would need to sit down and take a very good look at how much money you make and how much money you spend over the same period of time. Monthly budget is one of the most common types of budget, as many payments (such as utility bills, mortgage or rent payments) are being deducted on a monthly basis. If you are a full-time/part-time employee, you probably get your salary biweekly. 

budget expense items

Let’s consider a scenario – budgeting as a student

You are a college student, who has a student loan. You work part-time and get some support from your parents. You already own a laptop and a phone. You have certain expenses, including monthly car financing and insurance payments.

IncomeProjected Expenses
Student Loan: $2300 per year for two years
Part-time Job: $600 bi-weekly (after tax)
Parents’ support: $800 per month
Tuition + learning materials: $1850 per year
Room rental: $600 per month (includes utilities – hydro, water + Internet)
Car financing, insurance, gas: $450 per month
Phone plan: $55 per month
Groceries: $600 per month
Clothes: $400 per month
Entertainment: $300 month

Now, let’s see if you can afford your expenses with the income you have and whether you need to cut on something.

A student loan and learning materials for two years of college (this is how long the program is) add up to $3700. Therefore, the available student loan leaves you with $75 per month for living expenses.

MONTHLY BUDGET

IncomeExpenses
Student Loan: $7
Part-time Job: $1300
Parents’ support: $800
Room rental (includes utilities + Internet): $600
Car financing, maintenance, gas: $450
Phone plan: $55
Groceries: $600
Clothes: $400
Entertainment: $300
TOTAL INCOME $2150TOTAL PROJECTED EXPENSES $2405

It turns out that your projected expenses are higher than your available income and you would need to think about what and how you can cut back on some things in order to balance your budget (meaning not have any debt carried over to the next month).

Your expenses are $255 more than your income. You could cut on entertainment, but it is not fun to not have any entertainment at all. So, another option would be cut on new clothes and/or groceries. 

Your balanced monthly budget could then look like this:

MONTHLY BUDGET (adjusted)

IncomeExpenses
Student Loan: $7
Part-time Job: $1300
Parents’ support: $800
Room rental (includes utilities + Internet): $600
Car financing, maintenance, gas: $450
Phone plan: $55
Groceries: $550
Clothes: $245
Entertainment: $250
TOTAL INCOME $2150TOTAL EXPENSES $2150

Now your budget is balanced and if you stick to it, you will not have any additional debt other than your student loan and the remaining amount on your car financing when you graduate from college in 2 years. You won’t be able to save up much. However, you can always pick up a bit more work or cut a little bit more on one of the less essential items. 

Treat budgeting as a positive challenge that you need to complete. It will benefit you, help you stay organized and on top of your finances. It will help reduce stress as you will know that you are not overspending.