Budget

What It Means

A budget is a spending plan for a set stretch of time, most often a month. It lists the money you expect to receive, the costs you expect to pay, and what you plan to save. Comparing the plan with what actually happens shows whether your income covers your expenses and how much is left for savings or other goals.

How It Sounds at Home

• "That's not in the budget this month."
• "We went over budget on groceries again."
• "Let me check the budget before we book anything."

The Breakdown

The three parts

• Income: your pay and any other money you receive in the period.
• Expenses: what you spend on needs and wantsNeeds vs wantsThe split between costs you must pay to live, work and protect what you have (needs) and extras that would be nice to have (wants). See more, from rent to a streaming plan.
• Savings: what you set aside for goals and emergencies.

Worked example. Priya takes home $4,200 a month. Here's her plan next to what she actually spent:

She planned to keep $1,250 for savings and goals ($4,200 minus $2,950). Because spending ran $120 over, $1,130 was left instead.

What the result means. A category that runs over once is a nudge to watch it. When one runs over every month, the plan is probably wrong, and the number should change to match real life, with the difference taken from somewhere else. Categories that come in under free up money you can move to savings or debt.

Good to Know

The Consumer Financial Protection Bureau publishes a free monthly budget tool for listing what you earn and what you spend, and the FDIC's Money Smart programSave More TomorrowA savings plan by Richard Thaler and Shlomo Benartzi in which you agree now to raise your retirement contribution each time you get a pay raise. See more has a full chapter on budgeting. Costs that arrive once or twice a year, like car registration or an insurance premiumInsurance premiumThe amount you pay to keep an insurance plan, such as health insurance, in force, usually monthly, quarterly or yearly, whether or not you use any care. See more, are easy to leave out; dividing the yearly total by 12 and adding it as a monthly line keeps them from catching you off guard. If your pay changes from month to month, building the plan around a lower month means a slow month won't break it.

Related Terms and Categories

• Zero-based budget

  A budget that assigns every dollar of income to spending, saving or debt, so income minus everything assigned equals zero.

• 50/30/20 rule

  A budgeting guideline that splits after-tax income into 50% for needs, 30% for wants and 20% for savings and paying down debt.

• Expense tracking

  Writing down every purchase and bill as it happens, by category, so you can see where your money actually goes and compare it with your budget.

• Fixed expenses

  Costs that stay about the same every month, such as rent, a car payment or an insurance premium, usually due on a set date.

• Variable expenses

  Regular costs whose amount changes from month to month, such as groceries, gas, utilities and eating out.

Household money and budgeting