What Is a Budget? Definition & Types to Know

Written by Meagan DrewReviewed by Nathan Brown, CFP®Updated: 13th Sep 2022
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For some people, the word budget might rank up there with the four-letter words you shouldn’t say in front of your grandma.

However, it doesn’t have to be that way. Budgets offer a fully customizable experience to help you pay off debt, save for the future, or just see where your money is going every month.

What Is a Budget?

A budget is a financial tool that helps people track income versus expenditures for a specified period of time.

That’s stuffy financial speak for budgets are a way to see what money is coming in and what money is going out.

>> More: See the Best Budgeting Apps

Whats the Purpose of a Budget?

The Budget’s most basic purpose is to help you determine whether or not you can afford the lifestyle you’re living or planning to live.

Budgets allow you to clearly outline what money is income and what your expenditures are each month, year, or timeframe that works best for you.

If your income is not enough to cover your output, you know you need to make some adjustments. A secondary purpose of budgeting is to help you determine your wants and your needs.

While you may think that you cannot live without the best Pho ever 3x a week, you may find that to pay for gas that gets you to the job that pays for the Pho, the pho has got to go.

>> More: How to Budget

Why Is It Important to Budget?

While YOLO is true, it probably is not the best financial strategy for most people. Even MC Hammer and 70% of lottery winners go broke within a few years because they don’t have a plan.

The amount of money that you have is not as important as managing how the money that you have is spent.

Budgets allow you to see where your money is going and if you have more money going than coming. They can also help budgeters simply understand their spending patterns.

Budgeters may find that their spending is well under what they are bringing in, but budgets can also help to put excess funds to good use.

The most obvious reasons to Budget certainly include paying off debt, saving for a big purchase, saving for retirement, or saving for a vacation.

Budgeting is important, but the importance of what you’re budgeting for is completely individual.

Types of Personal Financial Budgets

There are three main types of personal budgets.

Zero-Based Budget

The first is the zero-based Budget which is a lot like what it sounds like in that you want to make sure that every single dollar has a job every month.

These budgets are the most precise and require budgeters to closely track expenditures because they’re going for a zero balance every month.

Thus, if these budgeters overspend in one category, they might leave themselves in a lurch at the end of the month.

50/30/20 Budget

The second type of personal Budget that is most popular with financial professionals and budgeters who prefer less rigidity is the 50/30/20 budgeting rule.

In this Budget, 50% of a budgeter’s income goes to things they need like a place to live, a car to drive, gas for the car, healthcare costs, etc.

The 30% of their income goes to wants. Wants include things like subscriptions, entertainment, and dining out.

The wants category can get a little out of hand, and that’s where most people derail without a budget, keeping them on the right path.

Goal-Based Budget

The last of the three main budget types is the goal-based Budget. This Budget is designed with the end in mind. These budgets are usually shorter-term and are focused on helping budgeters stay focused on their goal.

A goal-based budget is a great place to start for those looking to save for a new vehicle, a downpayment for a home, or a vacation.

Goal-based budgeting might also be the perfect plan for someone that needs to build an emergency fund.

The most important component of a goal-based budget is that all the extra money every month is funneled toward your goal, and you spend with that goal in mind.

Is it Hard to Build a Budget?

Budgeting does not have to be hard, and you don’t have to make it complicated. Budgets can be scribbled on a scrap sheet of paper or as complicated as an excel sheet with all the bells and whistles Microsoft has to offer. The key components of any budget are what you are making, what you are spending, and planning for.

Bottom Line: What is a Budget?

A budget is simply a way to compare what you are making versus what you are spending.

It’s a great tool to help anyone understand where their money is going and help them use that knowledge to make a plan about future spending.

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Meagan Drew
Meagan Drew

Meagan Drew is a Senior Personal Finance Writer & Product Analyst with 7 years experience in wealth management. As a former Series 7 and 63 certified advisor, Meagan specializes in making financial topics relatable and consumable, no matter the reader’s experience level. She attended the United States Military Academy at West Point where she studied Nuclear Engineering. Meagan is a veteran, military spouse, and mom of 4 currently living in Colorado Springs. Her areas of expertise are military personal finance, credit cards, personal loans, investing, and wealth management.