What Are the 5 Basic Elements of a Budget?
While it may seem obvious, creating a budget is a critical part of intelligently managing one’s own wealth, yet it is something that many people overlook or understate the importance of. At Harvest Wealth Partners, our financial planners are passionate about helping our clients work toward their financial goals, and we believe that meeting one’s financial goals starts with a good budget. Consider these five basic elements of a budget, and call our team directly to schedule your first appointment or learn more about our financial planning services—
Income
The first place that you should start when thinking about your budget is your income. This is simply how much money you have coming in each month (not to be confused with savings, which is how much money you currently have and should not be dipping into if you can help it). Make sure you record all sources of income, including Social Security or disability benefits you receive, income from wages, etc.
Fixed Expenses
After you have documented your income and know exactly how much you have to spend each month, the next step is recording your fixed expenses. These are expenses that are inflexible, won’t be changing, and that you cannot eliminate. For example, the amount you pay in mortgage or rent each month is a fixed expense, as are your utilities costs, car loan payment, basic grocery expenses, etc. Deduct these fixed expenses from your income so that you know how much you have left for other spending and saving.
Debt
Debt might fall into your fixed expenses. For example, if you have a mortgage loan or car payment or student loan, payments that you make on these every month are fixed. However, you might also have unsecured debt, like credit card debt. If you have unsecured debt, paying this off should be a top priority, as failing to do so could significantly harm your credit over time. As you think about your income, putting as much as possible towards paying down unsecured debts each month is key.
Flexible and Unplanned Expenses
The next category to think about when you’re creating a budget is related to flexible and unplanned/emergency expenses. Flexible expenses refer to things that you want, but don’t necessarily need, such as the new pair of shoes you’ve been eyeing or tickets to your favorite band’s concert. When thinking about how much money you have left to spend (after accounting for fixed expenses and debt), but sure to factor in unplanned expenses and savings, too. You should be allocating money to each of these funds as well.
Savings
Finally, don’t forget to think about your savings! This might include money that you’re saving for a rainy day or to have cash on hand, as well as money that you’re investing for the future. The general recommendation is to save about 20 percent of your income every month, although this may vary depending on your financial situation. You should prioritize saving over flexible expenses.
Call Harvest Wealth Partners Today for Help
To learn more about planning for your future and developing smart financial strategies, call Harvest Wealth Partners directly today. You can reach us by phone or online at your convenience.
FAQs
By identifying your income, fixed expenses, variable expenses, savings, and debt repayment, you can create a plan that works for you. To include each of these elements in your budget spreadsheet, you can create different categories or sections for each one.
What are the 5 basic elements of a budget? ›
By identifying your income, fixed expenses, variable expenses, savings, and debt repayment, you can create a plan that works for you. To include each of these elements in your budget spreadsheet, you can create different categories or sections for each one.
What are 5 major things to consider in your budget? ›
What monthly expenses should I include in a budget?
- Housing. Whether you own your own home or pay rent, the cost of housing is likely your biggest monthly expense. ...
- Utilities. ...
- Vehicles and transportation costs. ...
- Gas. ...
- Groceries, toiletries and other essential items. ...
- Internet, cable and streaming services. ...
- Cellphone. ...
- Debt payments.
Here are the most common components of an operating budget:
- Revenue. This includes all the different ways a company makes money by selling goods or services. ...
- Variable Costs. These are costs that rise or fall in lockstep with sales volume. ...
- Fixed Costs. ...
- Non-Cash Expenses. ...
- Non-Operating Expenses.
The three main elements, or parts, of a personal budget are income, expenditures, and savings. Each of the three elements plays a part in ensuring that a household operates and uses their income responsibly.
What are the 5 steps to the budgeting process in order? ›
Six steps to budgeting
- Assess your financial resources. The first step is to calculate how much money you have coming in each month. ...
- Determine your expenses. Next you need to determine how you spend your money by reviewing your financial records. ...
- Set goals. ...
- Create a plan. ...
- Pay yourself first. ...
- Track your progress.
A budget is a financial plan that outlines the expected income and expenses for a defined period. In business context, Budget can be a roadmap guiding resource allocation to achieve organizational goals and objectives efficiently.
What is the 50 30 20 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings.
What are the four 4 key components of a financial budget? ›
The Key Components of a Budget
Learn about net income, fixed expenses, variable expenses, and discretionary expenses and examples of each.
What are the 3 most important parts of budgeting? ›
For any organization, a budget, whether done annually or conducted throughout the year in the form of rolling forecasts, is a critical component for success. Any successful budget must connect three major elements – people, data and process.
A master budget is the central financial planning document that includes how a company will spend and how much it expects to earn in a fiscal year. A master budget contains budgets of departments within the organization and projections that allow for management to plan for the upcoming year.
What is not an essential component of a budget? ›
Expenses are divided into non-discretionary or discretionary costs. In other words, essential and non-essential expenses. Some expenses, such as vacation costs and luxury items, are not necessary to maintain a household and, thus, are classified as discretionary expenses.
What are the 6 key things to know about budgets? ›
Creating a budget
- Step 1: Calculate your net income. The foundation of an effective budget is your net income. ...
- Step 2: Track your spending. ...
- Step 3: Set realistic goals. ...
- Step 4: Make a plan. ...
- Step 5: Adjust your spending to stay on budget. ...
- Step 6: Review your budget regularly.
The primary goal of successful budgeting is to ensure financial stability. It involves creating a plan that accommodates both short-term financial obligations and long-term financial goals, providing a robust foundation for facing unexpected events and challenges.
What's the most common type of expense you have in your life right now? ›
Expert-Verified Answer. Depending on whether you own or rent your house, housing expenses usually make up the greatest portion of monthly expenses and include monthly mortgage or rent payments. Any additional expenses for utilizing and maintaining the residence are also included.
What are the three 3 key components of a financial budget? ›
Any successful budget must connect three major elements – people, data and process. A breakdown in any of these areas can have a major impact on your results. How do you bring together the 3 essential elements of a budget? Here are some tips.
