Budgeting

Budgeting Basics

Learn how a basic budget works and how income, expenses, savings, and cash flow can help you organize your money.

What is budgeting?

Budgeting is the process of organizing income and expenses over a specific period of time. A budget shows how much money comes in, how much goes out, and how money is distributed among different types of expenses and savings.

Budgets are commonly organized monthly because many sources of income and recurring expenses follow a monthly schedule. However, a budget can cover other periods of time depending on what is being measured.

At its most basic level, a budget provides a way to compare money received with money spent during the same period.

Understanding a few key terms can make it easier to understand how a budget is organized and how money moves through it.

Income

Money received during a period of time. Income can come from wages, salaries, business activity, benefits, investments, or other sources.

Expenses

Money spent during a period of time on goods, services, bills, and other financial obligations. Expenses represent money leaving a budget.

Fixed Expenses

Expenses that generally remain the same or similar from one period to another. Rent, certain loan payments, and some subscriptions are common examples.

Variable Expenses

Expenses whose amounts can change from one period to another. Groceries, transportation, entertainment, and dining out are common examples.

Needs

Goods, services, and financial obligations considered necessary for basic living and everyday responsibilities. Examples can include housing, food, utilities, transportation, and necessary healthcare.

Wants

Goods and services that are not essential for basic living but can provide enjoyment, convenience, or comfort.

Savings

Money that is set aside rather than spent. Within a budget, savings can be treated as one of the ways income is allocated for future use.

Cash Flow

The movement and timing of money coming into and going out of your finances during a period of time. Income represents money coming in, while expenses and spending represent money going out. When money is received and when payments are due can also affect cash flow.

How to make a basic budget

To make a basic budget, start by comparing the income received with the money spent during the same period. The difference shows whether money remains after expenses or whether spending exceeds income.

I − E = R
I

Income

Money received during the budget period.

E

Expenses

Money spent during the budget period.

R

Remaining Money

The amount left after expenses are subtracted from income.

What can the result show?

Comparing income and expenses can produce three basic outcomes.

Income > Expenses

Income is greater than expenses, so money remains after those expenses are paid.

Income = Expenses

Income and expenses are equal, so there is no money remaining from that period.

Income < Expenses

Expenses are greater than income, meaning spending exceeds the income received during that period.

Want to try this with your own income and expenses? Monthly Budget Calculator

Key takeaway

What should you remember?

A budget organizes income and expenses over a period of time. Understanding income, expenses, savings, and cash flow helps explain where money comes from, where it goes, and whether money remains after expenses.

Continue learning

Explore budgeting in more detail

Continue learning how income can be divided among different types of spending and savings.

50/30/20 Rule

Learn how the 50/30/20 rule divides income among needs, wants, and savings.