7.1 The Basics of Budgeting: Income vs Expenses

Budgeting is more than just tracking numbers; it’s a proactive approach to taking control of your financial life. It allows you to intentionally plan how to allocate your income toward your priorities, ensuring that you are not just reacting to financial challenges but actively managing them. Understanding the basics of budgeting is a fundamental skill for financial stability, especially when rebuilding after trauma or financial hardship. This lesson will delve into the principles of budgeting and explore how to strike a balance between income and expenses to create a roadmap for financial success.

What Is a Budget?

A budget is a detailed financial plan that outlines your income, expenses, and financial goals over a specific period, typically a month. It is a tool for ensuring that you live within your means and make conscious decisions about your spending and savings.

The Key Functions of a Budget:

  • Setting Priorities: A budget helps you prioritize your financial commitments and align your spending with your values and goals.
  • Control and Accountability: With a budget, you control how your money is spent, allowing you to be more accountable to yourself. It’s a way to ensure that every dollar has a purpose.
  • Planning for the Future: A good budget allows you to plan for upcoming expenses, both predictable and unexpected, and helps you save for future financial goals, such as building an emergency fund, retirement, or a large purchase.

Why Budgeting Matters: For survivors of financial abuse, budgeting is a powerful tool to regain autonomy over their finances. A budget serves as a blueprint for financial independence, allowing survivors to:

  • Avoid Overwhelm: Financial independence after domestic violence can feel overwhelming, but a budget breaks down the process into manageable steps.
  • Rebuild Financial Confidence: By actively managing money, survivors can regain confidence in their ability to make sound financial decisions.

Building Your Budget

When building a budget, it’s essential to go beyond merely tracking what comes in and goes out. Your budget should be a dynamic plan that adjusts to your evolving financial situation, needs, and goals. Here’s how to approach it:

Step 1: Define Your Goals Before you even start assigning numbers, take a moment to define what you want to achieve with your budget. These goals could range from paying off debt, building savings, or allocating funds for important life events, such as furthering your education or moving into a new home.

  • Short-Term Goals: These include immediate priorities like covering living expenses, building a small emergency fund, or paying off high-interest debt.
  • Long-Term Goals: Think about future needs, such as saving for retirement, purchasing a home, or ensuring you have enough savings to deal with future emergencies.

Step 2: Budgeting Categories

A key to successful budgeting is creating categories that reflect your priorities. Every expense should fall into a category, ensuring nothing is overlooked.

  • Needs: These are essential expenses like housing, utilities, food, healthcare, and transportation. Needs should take priority in your budget, as they are non-negotiable.
  • Wants: These include discretionary spending on things like entertainment, dining out, hobbies, or vacations. Although important for quality of life, wants are areas where you can adjust spending if necessary.
  • Savings and Debt Repayment: This category is critical for achieving long-term financial goals. It includes saving for an emergency fund, future expenses, or retirement, as well as repaying debt.

Step 3: Zero-Based Budgeting

One effective budgeting strategy is zero-based budgeting, where you allocate every dollar of your income to a specific category. This method ensures that every dollar has a purpose, whether it’s covering bills, saving, or spending. The goal is to “zero out” your budget so that every penny is accounted for.

  • Example: After calculating her income and expenses, Emily realized she had $200 left over each month. Instead of leaving it unassigned, she decided to allocate half to her emergency savings and the other half to pay down her credit card debt.

Balancing Income and Expenses

The Balancing Act: A balanced budget ensures that your expenses do not exceed your income. If you find that your expenses are higher than your income, it’s a signal that you need to either cut costs or find ways to increase your income. Achieving balance in your budget is crucial for financial sustainability and avoiding debt.

  • Adjusting Expenses: If you’re spending more than you earn, look first at your discretionary expenses (wants). Reducing these will have less impact on your quality of life than cutting essential spending.
  • Increasing Income: On the flip side, if cutting expenses is not enough, consider ways to increase your income, such as taking on additional work, freelancing, or exploring government assistance programs.

Case Study:
Sophia’s Budget Dilemma – After creating her budget, Sophia realized that her monthly expenses exceeded her income by $150. Instead of cutting back on essentials, she decided to reduce her dining-out budget and canceled a streaming subscription she rarely used. These small adjustments brought her budget into balance, allowing her to cover all her needs without relying on credit.

The 50/30/20 Rule
A popular budgeting guideline is the 50/30/20 rule, which suggests allocating:

  • 50% of your income to needs,
  • 30% to wants, and
  • 20% to savings and debt repayment.

While this rule provides a general framework, you may need to adjust it based on your unique situation. For example, if you have significant debt, you may want to allocate more toward debt repayment and less toward discretionary spending.

Emergency Preparedness in Budgeting:
A well-structured budget also includes planning for unexpected expenses, such as medical emergencies or car repairs. By allocating part of your income to an emergency fund, you can reduce the likelihood of relying on credit or loans during difficult times. Even small, consistent contributions to an emergency fund can provide significant relief in the future.

  • Example: Tom’s Emergency Fund – Tom made it a priority to set aside $50 a month into his emergency fund. After a year, he had $600 saved, which helped him cover an unexpected medical expense without going into debt.

Staying Flexible

A budget is not set in stone; it’s a flexible tool that should adapt to your changing financial circumstances. Life is unpredictable, and your financial situation will evolve over time, so it’s important to review and adjust your budget regularly.

  • Monthly Reviews: Set aside time at the end of each month to review your budget. Are you sticking to it? Are there any unexpected expenses or changes in income? Use this time to make any necessary adjustments to ensure you remain on track.
  • Adapting to Life Changes: Major life events, such as job loss, a raise, or a new financial goal, may require significant adjustments to your budget. Being proactive and flexible ensures that your budget remains effective.

Conclusion

Budgeting is an essential tool for gaining control over your finances. By understanding the basics of balancing income and expenses, setting clear financial goals, and staying flexible, you can create a budget that supports your long-term financial success. For survivors of financial abuse, budgeting serves as a lifeline, helping to regain control, rebuild stability, and work toward financial independence. With the right approach and mindset, a budget empowers you to take control of your financial future.