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Budget Definition

Budget Definition



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Definition of a budget

Definition of a budget

A budget is an estimation of income and expenses over a set time. It is usually drawn up and re-evaluated periodically.

Budgets can be made for a person, a group, a business, a government, or anything else that makes and spends money.


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Understanding budgeting

A budget shows the trade-off made when one item is exchanged for another. The result is:

  • A surplus budget, where profits are expected.
  • A balanced budget, where revenues and expenses are expected to be equal.
  • A deficit budget, where expenses are expected to exceed revenues.

Drawing up a budget means you'll know where your money goes, and you'll have greater control over your finances.


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Building a budget

  • The traditional budget starts with tracking expenses, getting rid of debt, and then building an emergency fund.
  • But you can speed up the process by building a partial emergency fund. It will act as a buffer to replace the use of a credit card for emergencies.
  • An emergency fund is used to prevent you from having to use your credit card for unexpected expenses.
  • Once this buffer is in place, its time to eliminate or substitute unnecessary expenses. Instead of buying coffee from a coffee shop every day, invest in a coffee maker, and save more money long term.
  • When you have completed downsizing, then only find new sources of income. This way, your added income will not be wasted.
  • It is better to have no debt before you begin investing.


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Sticking to a budget

Once a budget is set up, it is not always that easy to stick to it. But that doesn't mean you have to give up because you've failed once or twice.

  • Remember the big picture. A budget keeps you out of overwhelming debt and help you build to financial freedom.
  • Make it more difficult to make impulse purchases. Remove yourself off retailer email lists. Ask yourself "Is this purchase necessary?"
  • Find some support, such as an online forum, a monthly meeting, or even some friends that are trying to keep a budget.
  • Handle transactions in old-fashioned ways so you can see how much you're spending. For example, writing out cheques or paying cash.
  • Reward yourself for every month you've been faithful to your budget.
  • Schedule a periodic budget evaluation.
  • Educate yourself about finances, money management, and how you can best invest in yourself.


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Ways to budget when you're broke

  • Avoid immediate disaster. Request bill extensions or payments plans from creditors.
  • Prioritize bills. See which bills must be paid first and set up a payment schedule based on your paydays.
  • Ignore the 10% savings rule. It doesn't make sense to have a savings plan if you are fending off debt collectors.
  • Review your spending.
  • Eliminate unnecessary expenses. Start with items you wouldn't miss or habits that should change anyway.
  • Negotiate credit card interest rates. Call the card company and ask for a reduction in the annual percentage rates (APR).
  • Keep a budget journal. Monitor your progress for a few months.
  • Seek ways to increase your earnings - working overtime, getting a second job, or doing freelance work.


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Corporate budgets

Budgets are necessary for running any business efficiently and effectively.

  • Budget Development Process. Assumptions related to projected sales, trends, cost trends, and the overall economic outlook is established for the upcoming period. The budget is then published and outlines the standards and procedures used to develop it. The master budget includes forecasts of cash inflows and outflows, budgeted financial statements, and an overall financing plan.
  • Static Vs. Flexible Budgets. A static budget remains unchanged over the life of the budget. A flexible budget has a relational value to certain variables, such as sales levels, production levels, or other economic factors.


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Budgeting myths

  • Myth - I don't need to budget: A budget focus on identifying all the expenses that are likely to occur during the month, quarter, and year. A budget can identify costs that could be reduced or cut.
  • Myth - I'm not good at math: Budgeting software only requires you to follow instructions.
  • Myth - My job is secure: You should always be prepared for a job loss and have at least three months' worth of living expenses in the bank. With budgeting, you will know how much you spend each month.
  • Myth - Unemployment insurance will tide me over: You may be ineligible for unemployment insurance or the benefits may fall short of the amount you need.
  • Myth - I don't want to deprive myself: The aim of budgeting is to tell you where your money is going and ensure you're able to save a little each month, ideally 10% of your income.
  • Myth - I don't have anything big to save for: While you may not have any major savings goals at present, your situation and attitudes are likely to change over time.
  • Myth - I'm debt-free: However, being debt-free without any savings won't pay for an emergency.
  • Myth - I always get a raise or tax refund: It's never a good idea to count on unreliable sources of income.
  • Myth - I don't have the discipline: To protect yourself from your own spending habits, set up an automatic transfer to a savings account.


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