May 22, 2025
What Is A Budget? Explain Everything About
By : Ellie Brown
As an individual, you have dreams like owning a car, a home, and starting a business. For each of these aspirations, you need sufficient savings. What do you do to save money? Try to reduce the existing expenses. Surprisingly, reducing costs alone does not work. What next? You try to increase the income, but the expenses increase.
It is due to the financial strength and instincts to invest more in wants. Uncontrollable expenses impact the important payments. It thus affects your ability to save enough for your goals. Eventually, you end up in debt. Therefore, budgeting is important. It helps you understand your liabilities, earnings, and saving goals. The blog lists everything about budget.
How would you define a budget?
A budget is an estimation that’s made for a specific period. It involves earning, saving, and investing money from both short- and long-term perspectives. Additionally, a budget helps save money for emergencies, measure financial management success, and use resources well. It helps you understand and plan expenses before incurring them. Here is a basic example of a budget:
For example, if you want to buy furniture costing £12000, you must save money. For this, you decide to save £200/month, given your limited income. So, you can save money for 6 months of continuous savings. To ensure that you save £200, you try to restrict unnecessary expenses. Thus, you “budget” to purchase furniture. After 6 months, you use the money to buy furniture.
There is no one single strategy to create a budget. It may differ according to the person’s income, expenses, and debts.
Why is it important to budget?
Budgeting helps you avoid unnecessary expenses and save money for what’s important. It helps you limit overspending. Here are other factors that define why budgeting is important:
1. Identify where your money goes
Most individuals live from paycheck to paycheck. It prevents one from saving any money. However, you can increase flexibility by monitoring expenses. Analysing your credit report is the best way to do so. It lists aspects like payment history, credit score, types of credit, etc. It helps you know the things that you spend the most on. Thus, you can create a budget by restricting purchases to needs instead of wants. It is especially true if you live frugally on a low income.
2. Plan upcoming and unexpected costs
There are 3 types of expenses- general, unexpected, and luxuries. A budget grants the opportunity to understand your finances and plan accordingly. It helps you dedicate a percentage of your income towards luxuries and needs. It is usually ideal to spend 50% of your income on meeting needs, 30% on wants and save 20%. It is an important part of budgeting.
If this seems confusing, you can use budgeting apps to crack the deal. You can know the approximate amount you can save and techniques to do so by providing basic details related to your monthly expenses. The application may reveal the bifurcation of your expenses. Accordingly, you can save money for your life goals.
3. Get debt-free
The reason for restricted financial growth is debts (70%). Unless you clear the dues, you cannot grow financially. It halts your plans of seeking a mortgage, a car loan, new credit cards, or even starting a business. Therefore, clearing the debt should be your priority after saving money for essential expenses. For example-
If your monthly income is £50000, your monthly expenses are £20000, and investments plus loan payments account for 15000, you still have £5000 remaining. You can use this amount in :
- Saving for urgent expenses- £2000/month
- Spare cash- £200/month
- Repairs- £800/month
- Saving for next goals like- upholstery- £2000/month
Budgeting helps you understand how much you can use to pay the dues monthly. It also helps you understand the money you can save from the existing structure. For example, you can set auto payments for critical debts. It is separate from the above structure. Thus, identify the debts your credit report still reveals. Here is how you can use £5000-
- Paying credit card debt- £2000
- Paying overdrafts- £200
- Settling the payday loan debt- £2000
- Text loans – £800
This strategy may help pay off debt faster and gain financial momentum. Focus on paying high-interest debts (like the above) before the other payments. It heals your credit history and score.
Actionable Steps to create a budget as a beginner
Deciding how much of your salary you can spend on each aspect of your life makes things easy. Here are some actionable strategies that you may take to create your budget:
Step 1- Analyse your income (after tax)
It is the basic step that you must take to budget effectively. You generally receive income after a basic tax deduction. If your employer provides pension, insurance, or student loan coverage, it may also seem to result in deductions. So, identify the net income that you get after deductions. Moreover, your income may vary year-to-year. Thus, make a budget to understand your achievements, new goals, and the amount you must save to achieve them.
Step 2- Review your expenses
The next part is understanding your expenses every month. You can split them into two portions: wants and needs. Wants are luxuries or comfort elements in one’s life. It may include trips, shopping, eating out, going to movies, etc. However, needs include only those elements essential for leading your life. It is something you cannot do without.
It includes- shelter rent and basic amenities- electricity, gas, medicines, etc. You cannot compromise on this stuff. Thus, analyse your basic expenses from the credit report and make a budget accordingly. Prioritise saving for needs more than wants. It helps you stay on top of the important payments.
Step 3- Pick the right budgeting method
Yes, 2 types of budgets help you streamline your finances. It is:
1. 50/30/20
It works for anyone, starting with budgeting. Here, you spend 50% of your total income on meeting the needs (important bill payments). Next, you spend 30% on wants, that as watching movies, eating out, weekend getaways, etc. 20% accounts for the money that you are left with after meeting needs and wants.
2. Zero-based budget
In this, your expenses equal your income. It means you spend every penny that you earn in a month. It does not mean that you are broke. Instead, you dedicate every penny you earn towards a specific cost. However, this type of spending prevents you from tracking expenses.
Instead, do cash stuffing for better budgeting. It is a technique of saving money for every small expense in envelopes. For example, you can save money on utility bills, gas bills, credit cards, and groceries. It is measurable and prevents you from missing any bills.
Step: 4- Automate your bills and track your progress
Lastly, you can automate certain bills that you pay monthly. It prevents you from missing any payment. However, you must ensure that you have enough cash to cover the payments. If the bank notifies you of the empty account, don’t panic. You can pay the remaining bills by checking instant loans online. It helps you get the cash the same day, regardless of your credit score. Thus, it helps you remain on top of the payments.
Bottom line
Budgeting is a technique of remaining on top of one’s financial goals. It may include meeting monthly payments, investing money, saving and organisation. No two people have the same budget. It may differ according to the income, liabilities, debts, and unexpected expenses. Therefore, a budget helps you get financially independent, grants flexibility to decide the next best goals and saves money without worries.