| Starting Income | $3,000 |
|---|---|
| Living expenses | $2,000 |
| Debt repayments | $600 |
| Wants (shopping, dining out, travel, etc.) | $600 |
| Remaining balance | -$200 |
In this scenario, you’re spending more money than you earn. You’re taking on a bit more debt each month and feel pretty stressed about your finances.
The good news is that by comparing your income to your expenses, you now have a clearer view of where you can cut back. Consider reducing your “wants” spending or adding a part-time job to make ends meet.
Benefits of a Balanced Budget
The main benefit of a balanced budget is that it prevents you from taking on debt. It can help put a stop to overspending and show you where you can cut down expenses, increase your income, and save more money.
If you’re living paycheck to paycheck or are struggling to get this budgeting thing just right, taking time to balance your budget can help you pinpoint areas of potential improvement. As a result, you’ll feel more in control of your finances and be in a better position to tackle your financial goals.
Note
As helpful as a balanced budget can be, it may not be feasible for families that are consistently spending more than they earn because of low wages and other factors. In this case, meeting with a free financial counselor can help give you the tools you need to strengthen your finances.
How To Create a Balanced Budget
Balancing your budget is simply the act of comparing your income to your expenses to make sure the two are in alignment. Here’s how to do it.
1. Add Up Your Income
First, review your monthly income to see how much money you have coming in. This could be money from work, a side hustle, financial aid, Social Security, alimony, or any other revenue.
If your income fluctuates, look at how much money you made last year and divide it by 12 to get a monthly estimate.
2. Estimate Your Expenses
Now it’s time to estimate your monthly expenses. Review your bank and credit card statements to identify each one—housing expenses, car costs, food, insurance, etc. Some of these costs will stay the same each month (“fixed”), while others will change each month (“variable”). Do your best to estimate how much you spend in each category every month.
Note
As you add up your purchases, don’t forget to include less common expenses like homeowners insurance paid twice a year, oil changes, birthday gifts, and other irregular purchases.
3. See Where You Stand
For this step, all you have to do is subtract your expenses from your income to see if you get a positive or negative number.
If your balance is positive, you’re spending less than you earn. You can take this extra money and use it to build an emergency fund, pay off debt, invest for your future, put cash toward your next vacation, or any other goals on your list.
If your balance is negative, you’re spending more than you earn each month and operating at a deficit. To get back on track and balance your budget, look for ways to trim expenses and/or increase your income.
Note
Gone are the days of having to manually maintain a balanced budget all by yourself. Thanks to technology, you can use a budget app or budget spreadsheet to speed up the process, saving you time and energy along the way. Many banks also offer built-in budgeting tools to help you save money and keep your spending in check.
The U.S. Government and Balanced Budgets
In the U.S., a governmental balanced budget happens when the money the country spends (on health care, Social Security, infrastructure, federal debt interest, etc.) is equal to the money it collects (through taxation and other avenues) for the fiscal year.
A balanced budget is important because it helps maintain a healthy economy. But in reality, it’s difficult for countries to have a perfectly balanced budget—they’re usually operating in either a surplus or a deficit.
The U.S. has had 12 balanced budgets since 1947. The most recent year the U.S had a balanced budget was 2001.
