Budget

A plan for how you will divide your income among spending, saving and debt payments over a set period, usually a month.

What it means

A budget is a written or digital plan that matches the money you expect to receive against the things you intend to spend it on. Most people build one around a monthly cycle, because rent, utilities and many bills arrive monthly.

A budget has two jobs. Looking ahead, it decides where each dollar should go before it is spent. Looking back, it lets you compare what actually happened with what you planned, so you can adjust. There are many styles, from tracking every purchase to simple percentage rules, and the best one is usually the one a person will actually keep using.

Example

Suppose your take-home pay is $4,000 a month. You plan $1,400 for rent, $600 for groceries and utilities, $400 for transportation, $500 for savings, $300 for a loan payment and $800 for everything else, which adds up to exactly $4,000.

How it’s used

Getting control of spending after a raise, job loss or move
Saving toward a goal such as a down payment or emergency fund

Strengths and weaknesses

Strengths

Shows where money actually goes, which often reveals easy savings
Makes savings and debt payoff deliberate instead of leftover
Reduces surprises from irregular bills

Weaknesses

Takes time and attention to set up and maintain
Overly strict plans are easy to abandon
Income or expenses that vary a lot make estimates less reliable

Good to know

Include a line for irregular costs such as car repairs, gifts and annual fees.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.