7.3 Creating a Balanced Budget

The ultimate goal of budgeting is to ensure that your income is greater than or equal to your expenses. If your expenses exceed your income, it’s crucial to make adjustments to avoid accumulating debt or financial instability. A balanced budget enables you to live within your means while still working toward your financial goals, such as saving for the future or paying off debt.

Prioritizing Essentials

When building a balanced budget, your first priority should be to cover essential expenses—those that are non-negotiable and necessary for daily living. These include:

  • Housing: Rent or mortgage payments, property taxes, and homeowner’s or renter’s insurance.
  • Utilities: Electricity, water, gas, internet, and phone bills.
  • Groceries: The cost of food and household necessities like cleaning supplies and toiletries.
  • Transportation: Car payments, gas, maintenance, public transportation costs, or rideshare services.
  • Healthcare: Health insurance premiums, prescriptions, and regular medical expenses.

By focusing on these essential expenses first, you ensure that your basic needs are met. Once these necessities are covered, you can allocate remaining income toward non-essential expenses, savings, and debt repayment.

Example:
Sophia’s Essentials – After reviewing her budget, Sophia realized that her rent, utilities, and groceries took up 60% of her income. She made sure to allocate money for these essential expenses first before looking at other categories like entertainment or dining out.

Identifying Savings Opportunities

A key component of creating a balanced budget is identifying opportunities to save. Even small changes in your spending habits can free up money for savings or debt repayment, which can improve your overall financial health. Here are a few strategies for finding savings opportunities:

  • Cutting Back on Non-Essential Expenses:
    Consider reducing discretionary spending on things like dining out, entertainment, subscriptions, or shopping. These small sacrifices can add up over time and provide extra funds for important financial goals.
    • Example: Tom’s Savings Plan – Tom noticed that he was spending $100 per month on various streaming services. By canceling one service and cutting back on dining out, he freed up $75 per month to contribute toward his emergency fund.
  • Shopping Smart for Essentials:
    Even essential expenses like groceries and utilities can offer savings opportunities. Try using coupons, buying in bulk, or switching to energy-efficient appliances to lower monthly costs.
    • Example: Emily’s Grocery Savings – Emily started using meal planning and coupons to cut her grocery bill by 15%. This small adjustment gave her extra money to pay down her credit card debt.
  • Lowering Fixed Expenses:
    Explore options to lower fixed expenses like rent, insurance, or loan payments. You might be able to negotiate with your landlord, shop around for better insurance rates, or refinance a loan to lower monthly payments.

Action Step: Adjust Your Budget

Once you have listed all your income and expenses, compare the two to determine if your income covers all necessary expenses. If your expenses are higher than your income, adjustments are necessary to avoid going into debt or depleting savings.

  1. Review Non-Essential Spending:
    Look for categories in your budget where you can reduce spending. Start with non-essential expenses like entertainment, dining out, or subscription services. Small cuts in these areas can make a big difference in balancing your budget.
  2. Revisit Your Financial Priorities:
    If you’re saving for a long-term goal or paying off debt, but your budget is tight, consider reallocating some discretionary spending toward these priorities. For example, if you find extra money by cutting back on entertainment, you can use it to accelerate debt repayment or boost your savings.
  3. Seek Additional Income Sources:
    If cutting expenses alone isn’t enough, you may need to find ways to increase your income. Consider picking up freelance work, a side gig, or selling unused items. This extra income can help cover any gaps between your income and expenses.
  4. Reassess Regularly:
    A budget isn’t set in stone—it’s a living document that needs to be reassessed regularly. Life changes like a new job, a pay increase, or unexpected expenses might require you to adjust your budget. Review your budget monthly to ensure it reflects your current financial situation.

Example:
Carlos’s Budget Adjustment – Carlos realized that his income barely covered his essential expenses, leaving nothing for savings or entertainment. He decided to cancel his gym membership and cut back on dining out, freeing up an additional $150 a month. He used this extra money to start building an emergency fund, which gave him greater financial security.

Conclusion

Creating a balanced budget is a crucial step toward achieving financial stability. By prioritizing essential expenses, identifying savings opportunities, and making necessary adjustments, you can ensure that your income covers your costs while still allowing you to work toward your financial goals. Whether you need to cut back on non-essential spending or explore additional sources of income, a balanced budget empowers you to live within your means and avoid financial pitfalls.