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
The five basic elements of a budget include: determining resources needed and justifying them in terms of potential profit or savings ^[Finney], defining and understanding costs and what drives costs ^[Finney], forecasting revenue ^[Finney], predicting performance improvement ^[Finney], and dealing with financial and ...
What are the 5 basic elements of a budget? ›
The five basic elements of a budget include: determining resources needed and justifying them in terms of potential profit or savings ^[Finney], defining and understanding costs and what drives costs ^[Finney], forecasting revenue ^[Finney], predicting performance improvement ^[Finney], and dealing with financial and ...
What are the 5 main components of an operating budget? ›
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 main components of a budget Quizlet? ›
- What are the 5 basic elements of a budget? Income. ...
- Income. Source of All Spending.
- Fixed Expenses. Necessary const that usually occur monthly or annually.
- Variable Expenses. ...
- Planned Expenses. ...
- Financed Expense. ...
- What are the two types of income? ...
- Smart Budgeting in 10 Ways.
How to create a budget
- Calculate your net income.
- List monthly expenses.
- Label fixed and variable expenses.
- Determine average monthly costs for each expense.
- Make adjustments.
A budget is simply a spending plan that takes into account estimated current and future income and expenses for a specified future time period, usually a year. Having a budget keeps your spending in check and makes sure that your savings are on track for the future.
What are the six key components of a financial budget? ›
The six components of a financial plan include tracking income and expenses, budgeting, saving and investing, insurance, and retirement planning. By understanding and implementing these components, freelancers can create a secure financial future. It's essential to start planning as soon as possible.
What are the key principles of operational budget? ›
In a basic operating budget, there are three key components: Known expenses, both fixed expenses (i.e., salaries of management, rent, and utilities) and variable expenses (i.e., commissions, maintenance, and repairs), along with non-cash expenses.
What is an essential component of budgeting? ›
Every individual's budget needs to have a few key components, such as: Income: Your monthly income is the entire amount of money coming in. Savings: Setting aside some of your money for savings is essential. Necessities: the necessities of life, including mortgage or rent payments, food prices, and utility bills.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
What are the 3 P's of budgeting? ›
Introducing the three P's of budgeting
Think of it more as a way to create a plan to spend your money on things that matter to you. Get started in three easy steps — paycheck, prioritize and plan.
What are the key components of successful budgeting? ›
The key components of a successful budgeting model include a clear understanding of the organization's goals, a detailed estimate of income and expenses, a contingency plan for unexpected costs, and regular review and adjustment of the budget as necessary.
What are the four walls of budgeting? ›
Simply put, the Four Walls are the most basic expenses you need to cover to keep your family going: That's food, utilities, shelter and transportation.
What is the most important component of a budget? ›
Emergency Funds
The bedrock of any type of budget is an emergency fund.
What are the first 5 things you should list in a budget? ›
Common expenses to include in your budget include:
- 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.
The five purposes of budgeting are as follows:
- Resource allocation.
- Planning.
- Coordination.
- Control.
- Motivation.
Preparing a financial budget first requires preparing the capital asset budget, the cash budgets, and the budgeted balance sheet. The capital asset budget represents a significant investment in cash, and the amount is carried to the cash budget.
What are the three budget rules? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
