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What Are The Two Basic Parts Of A Budget?


What Are The Two Basic Parts Of A Budget?
Reading Time: 4 Min

Budgeting is a financial tool that allows you to allocate your income to specific spending categories and helps you keep track of where your money is going each month. When properly managed, a budget can help you save money, track expenses, and help you align your money with your goals. 

The two components of a budget are your Income and your Expenses. These components work together to help individuals and businesses manage their finances effectively. 

In this article, we go over the basic structure of a budget, how to account for your income and expenses, and how to manage both parts of your budget smoothly. 

Let’s start by looking at the foundation of your budget.

How To Budget For Your Monthly Income

Income is the foundation of a budget, as it determines how much money is available to allocate towards expenses and savings goals. Everyone has very different income levels, therefore, knowing how to set up your budget in a way that works for your income is vital. 

Below, we go over the different types of income to include in a budget.

Which Types Of Income Should You Include In A Budget?

Income isn’t always straightforward or consistent. When putting together your monthly budget, remember to account for all fixed sources of income. If your income is irregular, then work with the lowest minimum amount you can earn a month to put together the rest of your budget. 

Some common types of income to consider include:

  • Earned Income: This refers to the money earned through active work, such as salaries, wages, or freelance income.
  • Passive Income: Passive income includes money earned from investments, rental properties, or any other source that generates income without active participation.
  • Side Hustle Income: Side hustles are additional sources of income outside of your primary job. This can include freelancing, consulting, or running a small business in your free time. 
  • Investment Income: Income generated from investments, such as dividends, interest, or capital gains.

Aim to be as thorough and accurate as possible with your monthly income estimate.

How To Manage Expenses In A Budget

Expenses are the second critical component of a budget. They encompass all financial obligations and costs that need to be paid regularly or periodically. You can either aim to spend your exact budget on your estimated monthly expenses or try to track your expenses for a month before deciding on a fixed budget for each expense category.

Categories Of Expenses In A Budget

When categorizing expenses in a budget, it is helpful to group them into different categories. Some budget formats allow for Wants, Needs and Savings, for example. More specific types of expense categories include:

  • Fixed Expenses: These are regular expenses that remain relatively consistent from month to month, such as rent or mortgage payments, insurance premiums, or subscription services.
  • Variable Expenses: Variable expenses fluctuate based on usage or need. Examples include groceries, utilities, transportation, or entertainment expenses.
  • Debt Repayments: Debt repayments, such as credit card payments, loan installments, or student loan payments, should be considered as separate categories in a budget.
  • Savings and Investments: These categories include retirement savings, emergency funds, or investments in stocks or real estate.

To get an idea of your monthly expenses, go over your bank statements, credit card bills, and receipts. Once you know more or less where your money is going, you can reallocate it and cut down on unnecessary costs. 

Tools And Resources To Help With Budgeting

You might have an overall idea of your income and expenses, but putting them together in a way that makes sense can overwhelming if you don’t have a format or plan to work with. Luckily, there are several tools to help you set up a successful budget: 

  • Spreadsheets: Programs like Microsoft Excel or Google Sheets have customized budget templates if you don’t know how to set one up. Check out this example of a simple budget outline
  • Budgeting Apps: Mobile applications like Mint, YNAB (You Need a Budget), or PocketGuard offer convenient ways to track income, expenses, and savings goals on the go.
  • Online Budgeting Tools: Websites such as Personal Capital or EveryDollar provide comprehensive budgeting features and financial planning resources.

Once you have your budgeting medium, there are a few more points to keep in mind as you set up your budget. These are outlined in the following section.

Tips For Creating A Successful Budget

  • Set Clear Financial Goals: Before creating a budget, it is important to set clear financial goals. If your goal is to save, knowing how much you need to save in a certain period can help you calculate how much money to put away each month. 
  • Track Your Income and Expenses: To create an accurate budget, start by tracking your income and expenses for a specific period, such as a month. This will give you a clear picture of your spending habits and help identify areas where adjustments can be made.
  • Differentiate Between Needs and Wants: When categorizing expenses, distinguish between needs and wants. Prioritize essential expenses, such as housing, utilities, and debt repayments, before allocating funds toward discretionary spending.
  • Create Realistic Categories and Budget Limits: Be realistic when setting budget limits for each category. 
  • Review and Adjust Regularly: A budget is not a one-time exercise. It requires regular review and adjustment as circumstances change. Review your budget periodically and make necessary adjustments based on changes in income, expenses, or financial goals.

Remember, a budget is for much more than just income and expense tracking, it can also be a valuable saving and planning tool to help you align your resources with your long-term financial goals. Keep your goals in mind as you review and set up your budget, and soon, you’ll start seeing real, consistent changes in your spending habits. 

Author Bio

Mohamed Konate

Mohamed Konate is a personal finance expert, blogger, and marketing consultant based out of Toronto. He is a former financial services professional who worked for many years at major Canadian financial institutions where he managed the marketing strategy around various financial products ranging from credit cards to lines of credit. Mohamed is passionate about personal finance and holds a Bachelor in Business Administration from the University of Quebec (Montreal) and a Master in International Business from the University of Sherbrooke (Quebec).He is also the author of the Canadian Credit Card Guidebook. Read his full author bio