Meaning and Definition of Budget

A budget is a carefully thought out plan of spending the money available for the required period of time. Apart from spending the available
money for meeting our wants saving a part of the money is also important since saving of a part of the money is useful for meeting future
requirements. Hence personal budget means a plan of using available money wisely for necessary expenditure and also a plan for saving a
part of the money for the future needs.

This naturally involves estimating of what the income will be during a period and how much is to be spent on different items of expenditure
and what part of the income is to be saved. Hence budget is briefly described as a financial plan for future expenditure.

Definition of budget:

The main purpose of budgeting is to help an individual to derive maximum benefit from the personal income for that period. A budget is a
plan for spending and saving within a given income for a definite period say a week, a month or a year.

Characteristics of a Good Budget

Realistic Budgets:

The financial plans or budget are usually related to a particular standard of living. But a realistic budget is the one which reduces the
probability of over side of potential expenses, recognize expenditure with plans for spending and compare the proportion of expenditure with
priorities in goal attainment.

Every financial plan is personal and there is no right or wrong plan. But a realistic budget should include.

1. Long range goal and possible emergencies.

2. Repayment of due bills, debts and notes.
3. Commitments both regular (as mortgage payment) and irregular (such as taxes)
4. Miscellaneous, over looked items, unexpected expenses and extra spending.
5. Current living expenses such as food, clothing, allowance and transportation.
6. Satisfaction of near future goals.

The budget should be flexible and workable.

Flexibility:

If the budget is inflexible, it will not be functional. A flexible budget lists the normal fluctuating expenditures by heading such as clothing, gifts,
etc,. Assign an estimated percentage of incomes for each category.

A flexible budget will also allow for impulsive buying within a prescribed limit most people enjoy emotional spending and these are planned in
attainment. Flexibility in budget is increased when a range of expenditure is estimated for certain items that normally have fluctuating pattern.

Workability:

For a budget to be workable, it must include same practical methods to achieve the goals that have been identified for its time period.
A workable budget is complete, when it does not omit items that are normal for spending pattern of the group. Incidents such as stationeries,
postage, cosmetics, car repairs, recreations, gifts are some of items forgotten some times. If such items are considered as miscellaneous
expenditure in budget, this category must be adequate enough to include them.

Gaining maximum satisfaction from the budget requires accurate estimates of the cost of living. If the income pattern is irregular and income
is lower than the anticipated amounts the flexible side of the budget must be trimmed or saving is helpful to establish accurate estimates of
flexible expenditures.

Factors Affecting the Budget

Some people make the decision to prepare a personal budget to meet a very specific goal while others choose to create one in response to a
new job situation. Whatever your reason, it's a smart financial move. When you finally start creating your personal budget, focus on a few
important factors to ensure that it's complete.
✔ Income

The first important factor in preparing a budget is your income. When preparing a budget you need to focus on your net income, not gross.
The amount of money you take home each month is what you use to pay your obligations. You could still choose to list amounts that get
deducted from your income on a pretax basis, such as retirement contributions, in a separate area of your budget worksheet.

✔ Costs

Think of your personal finances as a business, and with any business you have costs required to stay in operation. When preparing your
budget you must take every expense into account. Anything that you spend over the course of the month must get recorded in your budget,
and that can prove difficult in some cases. You must include even the small purchases you make at the neighborhood convenience store to
get an accurate total for your budget.

✔ Balance

The next important factor in preparing a budget is achieving balance. The side of your budget worksheet that lists income must equal the
side for expenses. More income than expenses is a nice problem to have — just assign the excess to a savings account or other initiative. If
after you record your budget details you have more expenses than income, that's a more serious problem that requires you to reduce
expenses and possibly identify new ways of making money.

✔ Goals

Another key component you need to address when preparing a budget is how to reach certain financial goals. Take time to mull over the
short- (less than a year) and long-term (one or more years into the future) goals you want to achieve with your money. Record this
information in your budget worksheet and monitor your progress toward those goals regularly.

Tips in Making a Budget

A budget is going to give you an action plan and clear picture of where your money is ending up each month. Budgeting will help you
achieve the goals you’re working toward—whether that’s getting out of debt, saving for retirement, or just trying to keep your grocery bill
from getting out of hand.

When you see planning a budget as simply spending your money intentionally, you can actually find more freedom to spend! Once
something has been budgeted for, you’ll be able to spend that money without feeling guilty. Many people even say they find "extra" money
after they create a realistic budget and stick with it. How amazing is that?

1. Budget to zero before the month begins.

Before the month even starts, you’re making a plan and giving every dollar a name. It’s called a zero-based budget. Now that doesn’t mean
you have zero dollars in your bank account. It just means your income minus all your expenses (outgo) equals zero.

2. Every month is different.

Be sure to adjust your budget each month as things change. Make a savings fund you can stash cash in throughout the year. When you
don’t have a plan, you’re going to be stressed. And that takes all the fun out of giving and celebrating.

3. Start with the most important categories first.

Giving and saving are at the top of the list, and then comes the Four Walls—food, shelter and utilities, basic clothing and transportation.
Once your true necessities are taken care of, you can fill in the rest of the categories in your budget.

4. Pay off your debt.

If you have debt, paying it off needs to be a top priority. Get rid of debt as fast as you can. Attack it! Get mad at it! Stop letting debt rob you of
the very thing that helps you win with money—your income.
5. Don’t be afraid to trim the budget.

If things are tight right now, you can save money quickly by canceling your cable, dining out less, and shopping at discount clothing and
grocery stores. Remember, your budget cuts are only temporary. You can always make adjustments later down the road.

6. Make a schedule (and stick to it).

While you’re making a budget part of your monthly routine, pick specific dates for other expenses. When you know what to expect and when
to expect it, you take a lot of stress and potential pitfalls out of the picture.

7. Track your progress.

It’s important to check your progress from time to time. Look back at your earlier budgets to see how far you’ve come. And don’t forget to
celebrate the small wins. If pen and paper (or spreadsheets) aren’t your thing, it’s time to join the 21st century and use a budgeting tool. You
can focus on planning a budget and tracking your spending from the comfort of your smartphone!

8. Create a buffer in your budget.

Put a small amount of money aside for unexpected expenses throughout the month. Label this as your miscellaneous category in your
budget. That way when something comes up, you can cover it without taking away money you’ve already put somewhere else. Keep track of
expenses that frequently end up in this category. Eventually, you might even want to promote them to a permanent spot on the budget roster.

9. Cut up your credit cards.

If you’re really committed to sticking to a budget and getting out of debt, you need to ditch those credit cards for good. Having no credit card
debt will mean no more minimum payments to add to the budget, zero hassle with fees or high interest rates, and much less stress and
worry!

10. Use cash for certain budget categories that trip you up.

If you’re constantly overspending on your grocery budget or fun money, cash out those categories and use the envelope system to hold you
accountable. Just go to the bank and pull out the cash amount you’ve budgeted for that category. Once the cash runs out, stop spending!

Steps in making a Budget

The following steps are involved in developing a budget plan.

1. Estimation of Income: The total income must be estimated before developing a budget. The total income includes income from
sources like salaries, wages, interest, rent, dividend etc.
2. Listing out items for buying needed and also list out the services needed throughout the budget period.
3. Finding out the prices of the concerned items from shops, friend etc/estimate the cost of desired items, total each classification
and strike the total for the budget, past records are helpful in this connection (Bills, Receipts etc).
4. Listing of items of fixed costs like rent or taxes etc.
5. Priority list of items and anticipated items to be prepared.
6. Keeping aside a definite amount for saving to meet emergency expenditure or for future benefit.
7. Bring expected income and expenditure in balance.