Budgeting

Definition

Budgeting is a method of controlling debt accumulation by taking a more disciplined look at the inflows and outflows of money into a household or business. It's usually the first debt elimination alternative pursued by individuals, and is often used by debt counselors when helping those in need.

Explanation

Not everyone has access to software applications, or knows how to begin building a family budget.  The process starts with a summary of the sources of income and expenses for an individual or family.  A realistic, long-term budget is one where the inflow of money (family income), exceed the outflow (family expenses).

Typical sources of income Include:

  • Salaries, rents, tips, fees, social security, pensions, individual retirement accounts, and interest income.  Most individuals have a very good understanding of their sources of income.

Typical categories of expenses include:

  • Housing:  rents, mortgages, property taxes, electricity, natural gas, phones, water and other utilities, maintenance, and repairs.
  • Transportation:  vehicle loans, gasoline, train or bus fares, licensing, and maintenance.
  • Insurance:  health, life, homeowners, and automobile.
  • Food:  groceries and restaurants.
  • Personal:  medical, clothing, health clubs, organizational fees or dues, personal care, and grooming.
  • Children:  medical, clothing, tuitions, school supplies, lunch money, toys and games, as well as child care.
  • Pets:  medical, food, and grooming.
  • Entertainment:  vacations, movies, concerts, sporting events, and cultural activities.
  • Loans:  student, personal, and credit cards.
  • Other:  legal fees, gifts to others, donations, and charitable gifts.

When attempting to balance a budget, it's important to further categorize expenses into those that are mandatory (need to have) versus those that are discretionary (nice to have).

Related Terms

bankruptcy, debt consolidation, debt negotiation