What is a budget?

Reading 1: What is a budget?

Welcome to the Basics of Personal Budgeting course! Let us jump in by asking the simple question: What does someone do when they budget?

People generally use the word “budget” in two ways. We can either say (i) “I have prepared or written a budget”, or something in the line of (ii) “I am budgeting to pay a deposit on a car”. Although sounding similar to an extent, having a budget and budgeting for something are different from each other. A written budget in its simplest form is where we actively compare our total income to our total expenses with the aim of measuring and controlling our income and expenses, while “budgeting for something” means that we are saving for a specific event or object with the aim of purchasing this item. A person can “budget for” a single purchase or expense even if they do not have a written budget and the rest of their finances are out of control.

People lose track of their finances for many reasons – some because they shy away from the responsibility or discipline of budgeting, and others because they have massive incomes or inherited a lot of money. Overall, not many people are able to survive for long without some form of financial discipline. A budget is the most basic and the most valuable tool for those who want to control their finances, because it provides a framework within which many little and big decisions have to be made. For instance – do you know how much people who smoke spend on cigarettes or chocolates during a year? I’m asking this very question because a gardener once told me that he wishes that he could buy a nice flat screen TV. We sat down and worked out that he could easily afford one without credit if he stopped smoking and eating chocolates for while and saved up the money! What do you think happened? I’ll let you know in another day’s reading (Reading 13).

In this course we are going to firstly lay the foundation for understanding why a budget is needed and the steps to creating a written budget, and only then will we investigate how to manage some of the specific items on a budget and how to plan for special events and unusual expenses. The next reading will start the discussion on who should have a budget.