What is a budget?
Most people have heard of a budget. In fact, a surprising 58% of Americans said they feel comfortable creating a personal budget and over half of Americans currently use budgeting tools (Clutch). This is great news! We are about to take a dive into what goes into a budget. A budget is comprised of three main categories:
1. The money you make. Your income, dividends, interest, and other forms of income
2. The money you tuck away. Investments, savings, and retirement
3. The money you spend. Expenses such as home and rent payments, gas, groceries, and countless other expense categories. Even simpler: the money in versus the money out. We will go into more detail on this below.
Why is a budget important?
Let’s start by asking ourselves a few questions:
Do you want to retire comfortably one day?
Do you want to be able to provide in excess for your children’s education?
Do you have a dream vacation you want to go on one day?
Do you have a dream car you would like to own?
Is there a designer purse you would like to own one day?
I could go on and on, but if the answer to any of the above questions is a yes, then a budget can turn these questions and goals into realities. In addition to future planning and goal setting, one of the main reasons that keep a budget is important is to gain peace of mind. You can have that feeling of security and comfort knowing the exact status of your finances and where you stand in relation to the progress on your goals. You can also have an action plan when that unexpected car repair comes along or the bonus you got from work was less than you expected. Budgets are important for every income bracket, where you are calculation how much money you are able to invest or save each month or you are living paycheck to paycheck, a budget is a great way to examine where you can start spending less or earning more.
The money you make (Income)
At My Financial Snapshot, we break a budget into 3 categories.
The first of these is income; the money you make. Most people receive money from one source, a paycheck, but we will also give details on other income categories that are features in our budgeting tool. In the image below you see we break income into 14 different categories. These categories are meant to represent all of the ways that money can flow to you. The most popular category is Salaries and Wages. Let’s take a look!
The money you tuck away (Investment and Savings)
Budgets are often thought of as income and expenses, however this missies some of the most important categories. At My Financial Snapshot, we want to identify and separate where you are putting your money away for future use. We believe that budgeting can ensure you are leaving behind a legacy of multi-generational wealth. We highlight 11 main categories where people should be tucking away money for future use.
The money you spend (Expenses)
Here is a sad reality; money goes out of your pocket in a lot more ways than it comes in. Not only are there categories of expenses, but there are often subcategories behind these categories. Take our first category of automobile expenses, for example. The subcategories of this would be a car note or lease payment, gas, repairs and maintenance, insurance, and more. Check out the 13 categories of expenses that are apart of the My Financial Snapshot budgeting tool.