The word budgeting often conjures up images of restrictions and all the things you can’t buy and can’t have, doesn’t it? You’re not alone if you associate budgeting with negative implications for your life. In some cases, budgeting can be challenging. But that doesn’t mean you should throw in the towel and give up.
A budget can set you on a path to financial security. It can help you know exactly where your money goes and how you tend to spend it during different phases of your life. Budgeting offers security and safety in times when both are in short supply. A budget serves as a map for readily achieving your financial goals, and it can give you power over situations that seem like they may be out of your control.
Here’s everything you need to know about the basics of the inflow and outflow in your budget. These concepts will help you set up a budget that works for you and your loved ones.
Everyone Already Has a Budget
If you handle money, then technically you already have a budget. See how easy that is! Thinking about a budget this way can help you understand the basics of budgeting and make budgets seem less restrictive and scary. The general idea is that you can only spend what you already have. Money in, money out.
Budgeting is essentially a guide to help you decide how best to spend your money. Think back to when you were a kid and used to get an allowance. If your parents gave you $10, what did you decide to do with that money? Spend it right away on candy and stickers? Save it to buy a dream toy you wanted? That’s budgeting. It’s a way to plan for your future expenses, needs, and wants.
It’s All About Cash-Flow Management
Whether you’re considering implementing a budget for your business or your personal finances, ultimately, a budget is all about cash-flow management.
Cash-flow management is a fancy way to describe the money that comes in and the money that goes out over a set period of time. While managing money in/money out sounds kind of basic, it can be complex. Timelines can shift, the amount of money coming in may drop off, and paying bills may require more resources than you had expected. Keeping on top of the constant movement of money can be daunting in many ways, but it is doable. Cash-flow management can help you work toward a goal or help you anticipate future spending and perhaps even lessen the blow of unexpected costs. Don’t let fancy jargon scare you. Budgeting is really about managing how your money flows, both in and out.
The Money That Comes in
While it may seem simple to identify money coming in, there is some subtlety to it. It’s logical to think that “inflow” is just what you take home in your paycheck, but you should also consider other sources of inflow when it comes to budgeting. These can include things like money loaned to you, dividends, or windfalls such as those from a legal settlement, a divorce, or the sale of a business or home.
Consider reframing your idea of incoming money to include other things you might be able to leverage or use to pay your bills. Money that comes in is more than just what shows up in your bank account every few weeks from your employer. By thinking this way, you broaden your perspective, and budgeting may not feel as restrictive since you have other areas to tap in order to access funds.
The Money That Goes out
Money going out can—and often does—pose the most significant stumbling block for people who are new to budgeting. What exactly counts as outflow? There are many different types of budgets, but the most common and one of the easiest to understand is the 50/30/20 budgeting model.
In this model, you consider two buckets of outflow and one bucket that counts as inflow (or really, as a bit of a hybrid). These three bucket categories include needs, wants, and savings/money for debt. Needs are the things you must have to keep you and your family safe, clothed, warm, healthy, and fed. On the other hand, wants are things that you would like to have in your life but that don’t necessarily determine your survival.
As a general rule of thumb, it makes sense to set aside 50 percent of your income (not your total inflow) for needs. These expenditures include groceries, housing, heating and cooling, electricity, connectivity (cell phones, internet, etc.), insurance, healthcare, transportation, childcare, and minimum loan and credit card payments. These are the bare necessities you need to cover your daily living expenses. If your needs budget exceeds 50 percent of your income, you will likely have to take from your wants budget to cover the shortfall.
You should allocate around 30 percent of your income (again, not your inflow since that can be different from strictly “income”) for wants. Wants can include entertainment, travel, new clothing, and gifts. Making the delineation between needs and wants can be tricky for many people. How do you determine the difference? The truth is that it really comes down to your individual priorities. For example, do you “need” a gym membership in order to really be able to focus at work? What if you have a big interview coming up for a new job and “need” a new suit? Deciding whether these items are needs comes down to your priorities, and you should assess these incidental types of expenses as wants or needs one at a time as they come up.
The remaining 20 percent of your budget should go back into the inflow bucket. This means you should plan to allocate at least 20 percent of your income to savings.
If one section of your budget overshoots the allocated amount, you’ll need to make adjustments to other parts to balance the budget. These guidelines offer understandable and straightforward principles to follow when thinking about your inflow and outflow.
Do More with Less and Stick to It
Budgets help us do more with less. They also help us understand where our money might be leaking away and where we might be able to shift our lifestyle or wants to adjust for an increase in another area. Yet it’s not enough to simply set a budget; you have to work hard to stick to your budget.
A budget should be used as a guide for every financial decision you make, whether you’re choosing between organic groceries and conventional ones or trying to choose the right car for you or your family. A budget is not something you “set” once and forget the next time you decide to do some online shopping. You have to continue to check in with your budget and make adjustments to it in order to achieve your financial goals.
Don’t Be Too Hard on Yourself
Just because you set a budget, try to stick to it, and understand the idea of inflow and outflow doesn’t mean that you’ll always succeed at managing your cash perfectly. We’re human, and things come up in our lives that require us to adapt and change our plans. A budget is a tool to be used, not just one more thing to beat yourself up with. Be kind to yourself and your loved ones whether you’re just starting a budgeting plan or are an old hand at managing your money. It takes time to make these kinds of adjustments, and it can take a lot of work to get spending under control.
Additionally, our spending habits have psychological roots, and that means we should be gentle with ourselves and others when we don’t hit our financial goals right away. Understanding the causes of spending can take time to untangle and bring up various emotions when a budget forces us to take a closer look at what our thoughts and feelings are around resources. It’s always wise to get advice from a financial expert if you’re struggling with money management. Sometimes an outside voice can give you insight into issues you may not realize are holding you back from achieving your financial goals.
Sometimes, when you feel frustrated with a budget or its constraints, it pays to take a step back and refamiliarize yourself with the basics of budgeting to understand just how useful and beneficial creating and sticking to a budget can be. It’s also important to know that practice, as always, makes perfect. So if you fail at sticking to one type of budget, don’t be too hard on yourself. Make the adjustments you think are necessary and move forward to try again.
The Bottom Line
Budgeting may seem like drudgery, but in reality, it’s just one more tool in your financial toolbox that can be used to make your life better. One of the first steps to understand budgeting is tracking the money that comes in and goes out. While it may seem incredibly elementary, understanding the subtleties of inflow and outflow can empower you to make better, more well-informed financial decisions when you need to. Ultimately, budgeting helps you plan for the future in a way that can make what seem like impossible goals more attainable.