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 budgets? ›
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? ›
What Are the Parts 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 Key Components of a Budget
Learn about net income, fixed expenses, variable expenses, and discretionary expenses and examples of each.
What are the key components of a budget in a business? ›
Operating budget
It includes fixed cost, variable cost, capital costs, and non-operating expenses. Although this budget is a high-level summary report, each line item is backed up with relevant details. This information is useful for checking whether the business is spending according to its plans.
What are 5 budgets? ›
The five most commonly used business #budgeting methods are the zero-based budget, incremental budget, activity-based budget, value proposition budget, and Flexible budget. each of these methods has its #advantages and #drawbacks, so it's important to choose the one that is best suited for your business.
What are the 5 most important things about budget? ›
Budgeting can help you set long-term financial goals, keep you from overspending, help shut down risky spending habits, and more.
- Helps You Work Toward Long-Term Goals.
- Can Keep You from Overspending.
- Can Make Retirement Saving Easier.
- Helps You Prepare for Emergencies.
- Can Reveal Spending Habits.
- The Bottom Line.
phases: budget preparation, budget legislation or authorization, budget execution or implementation and budget accountability. While distinctly separate, these processes overlap in implementation during a budget year.
What are the components of the budget? ›
There are two primary components of a government budget, namely – the capital budget and revenue budget. Capital budget accounts for the assets and liabilities under the government. Revenue budget, on the other hand, accounts for the total revenue generated and the expenses met through this revenue. 3.
What are the 4 C's of financial management? ›
Character, capital, capacity, and collateral – purpose isn't tied entirely to any one of the four Cs of credit worthiness. If your business is lacking in one of the Cs, it doesn't mean it has a weak purpose, and vice versa. Instead, the four categories come together to constitute purpose.
There are three main areas in your budget that should be automated: your income deposits, your bills, and your main financial goal.
What are the 4 elements of financial planning? ›
Most financial management plans will break them down into four elements commonly recognised in financial management. These four elements are planning, controlling, organising & directing, and decision making. With a structure and plan that follows this, a business may find that it isn't as overwhelming as it seems.
What are the five key areas of budgeting? ›
What Are the 5 Basic Elements of a Budget?
- Income. The first place that you should start when thinking about your budget is your income. ...
- Fixed Expenses. ...
- Debt. ...
- Flexible and Unplanned Expenses. ...
- Savings.
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.
What are the five functions of budget? ›
The five purposes of budgeting are as follows:
- Resource allocation.
- Planning.
- Coordination.
- Control.
- Motivation.
