A budget is a financial document of a foresight nature, aimed at projecting future income and expenses. It is widely used by companies, no matter their size, but also by households, to have forecast and expense management.
A master budget or operating budget represents for companies a framework of action to follow and a set of goals that must be met, under criteria of rationality, coherence and productivity.
Even in homes, the budget is an organizational tool that allows better control of expenses and ensures that savings are always oriented towards the achievement of a particular plan or goal.
Every successful budget takes into account a common set of categories or basic characteristics. It ensures that you do not spend more money than you receive in your average monthly income, and allows you to plan future expenses, in addition to giving you room to save. A sensible budget takes your financial goals into account and helps you achieve them by controlling the amount of money you spend.
For the Virginia Credit Union financial corporation, a good budget of any kind or scope meets the following decalogue of attributes and characteristics:
- It must be expressed in quantitative-monetary terms and complemented with a statement of premises or assumptions that support the calculations.
- It is formulated in relation to the actual and standard expenses generated during a certain period of time in the past.
- It is sensible, realistic and based on the historical
- Encourages savings, aimed at very particular purposes
- Directs efforts towards specific objectives or ends
- It is flexible, allowing adjustments to be made on certain unadjusted initial premises or changing circumstances
- It is not based on extraordinary items or imprecise assumptions
- Take into consideration the reasonable perspectives or points of view of different stakeholders
- It is as detailed and complete as possible
- It is constantly monitored and evaluated
We explain the characteristics that a good budget must meet based on its components.
The attributes of a good budget
Taking the habit of preparing a budget that complies with the above-mentioned decalogue, and implementing a set of actions that allow it to be fulfilled, guides us to maintain a certain lifestyle, to promote savings and to better cope with difficulties and unforeseen events.
A well-formulated budget covers four fundamental aspects:
- Create income awareness
- Emphasize expenses, their amount and justification
- Reorient spending, saving and investment habits
- And set financial goals
Origin and amount of income
Every good budget starts with the sources of income; The most common is that your job is your main source of income, although there may be alternative sources such as bonuses, professional practice fees, interest or investment returns, stock dividends, rent collection, among others.
Your income is a very important variable or component to measure in your budget.
Based on the amount of income, the propensity to spend and saving are established and correlated, that is, expenses and savings limits are stipulated, determining the amount of money you have available to spend and in which items.
If the size of your actual income doesn’t allow you to comfortably meet all of their needs and save for the future, and have a small amount to spare to do fun things, then you have an income crisis. Consider finding other ways to increase your income to solve your budget problems.
Propensity to save and invest
Setting savings and investment priorities is an important part of a successful budget.
A budget is not just a list of income and expenses: it is a tool to help you create wealth through savings and investment, as well as better control of your finances.
A good budget contains a savings section and an investment category, focused on creating long-term wealth. One part of that category may be retirement savings.
The investment goals and savings on a budget will be unique to each family or individual; there are couples that are scheduled for the sole purpose of achieving their dream vacation, traveling the world, buying a new car, a home, or simply creating a savings fund in case of an eventuality.
If your income allows it, you can set a goal to save $ 1,000 per month (or an accessible amount in your currency). A very good recommendation is to start saving at least 10% of your income every month for this category.
Forecasting for an emergency
A good budget also creates provisions of funds to deal with unforeseen expenses, such as the loss of a job, major car repairs, or high medical expenses from expensive surgery or treatment.
A provision fund can also cover less dire contingencies like unforeseen home repairs like a broken plumbing, heat damage, or a leaky roof.
Six months of income in an emergency fund will go a long way in most emergencies. Once you reach this amount, you do not need to continue contributing, although you must replace the money once you use it.
Expenses for necessities
Each budget should include a list of your monthly expenses that cover your basic needs. As the percentage of income that must go to food and clothing.
These are the basics you need to take care of your family, such as food, housing, transportation, education, insurance, and utilities.
It is important to differentiate the needs from the wants. For example, is pay TV a necessity? Your nights might be less interesting without the latest HBO seasons or our Netflix trends, but you can live without them! Which is not the case with electricity or a mortgage.
You know you can reduce the amount you spend on your necessities, but you shouldn’t be able to completely take them out of your budget.
Taste or discretionary expenses
We enter, even if it is uncomfortable, in the malleable part of the family budget. Although it is important to also include tastes in the budget, these are the items that will always be adjusted in the event of an eventuality or a significant decrease in income.
If you do not spend money on recreation, no matter how minimal, you should prepare to visit the doctor, due to stress or exhaustion. Our likes typically include: evening coffee fee, Friday afternoon pizza, cable TV, entertainment expenses, Saturday night outings, gym memberships, girls ballet, school of soccer of the child, pedicures of the poodle, among other examples. The list could be much longer.
Our discretionary spending explains a lot about our habits; If you add up what you spend monthly or annually on each of them, you will see that they are no longer a “small indulgence”. Just make sure your tastes don’t stop you from reaching your short-term and long-term financial goals. Success with your plans!