How to Make a Budget

A budget is a plan that shows how much money comes in and how much goes out over a set period of time, such as a week or a month. Making a budget helps you see exactly where your money is going so you can spend wisely, avoid running short, and still put some money aside for the future.

Every budget compares two things: income (money you receive) and expenses (money you spend). The relationship between them can be written as a simple formula:

\( N = I - E \)

Here, \(I\) is total income, \(E\) is total expenses, and \(N\) is the net balance left over. If \(N\) is positive, the budget has money left to save. If \(N\) is negative, spending is greater than income and the plan needs to change.

Without a budget, it is easy to spend more than you earn without noticing. A budget gives you control: it shows how much you can safely spend on things you want, how much must go toward things you need, and how much you can set aside as savings. This connects closely to understanding your income and savings, since a budget only works once you know exactly how much money is actually available to plan with.

Building a budget usually follows four steps.

Step 1: List your income. Add up every source of money coming in, such as an allowance, a part-time job, or gift money. If your income comes from an hourly wage, salary, or commission, understanding the different types of pay can help you calculate this total accurately.

Step 2: List your expenses. Write down everything you spend money on, splitting it into fixed expenses (amounts that stay the same, like a phone plan) and variable expenses (amounts that change, like snacks or entertainment).

Step 3: Separate needs from wants. A need is something necessary, such as transportation to school or basic supplies. A want is something extra, such as video games or eating out. Needs should generally be covered before wants.

Step 4: Balance the plan. Use \( N = I - E \) to check the result. If \(N\) is negative, reduce spending on wants first. If \(N\) is positive, decide how much of that extra money to save, perhaps in a bank account, and how much to spend.

Suppose a student earns \(220\) dollars in one month from an allowance and a small part-time job. Their expenses for the month are: \(40\) dollars for a phone plan, \(60\) dollars for transportation, \(50\) dollars for entertainment, and \(30\) dollars for snacks.

First, find total expenses:

\( E = 40 + 60 + 50 + 30 = 180 \)

Then find the net balance:

\( N = I - E = 220 - 180 = 40 \)

This student has \(40\) dollars left over. Since the phone plan and transportation are needs while entertainment and snacks are wants, they might choose to save part of the leftover \(40\) dollars and spend the rest, rather than spending it all right away.

A common budgeting guideline suggests splitting income into three parts: about \(50\%\) for needs, \(30\%\) for wants, and \(20\%\) for savings. Using total income \(I\), this looks like:

\( 0.50I + 0.30I + 0.20I = I \)

The figure below shows how \(200\) dollars of income would be divided using this guideline.

Not every budget has to follow this split exactly, but it gives a useful starting point when you are not sure how to divide your money.

• Track spending for a week or two before building your first budget, so your expense list is realistic.
• Round numbers carefully and always double check that \( N = I - E \) balances correctly.
• Review your budget regularly, since income and expenses can change from month to month.
• Set a small, specific savings goal rather than a vague one, such as saving a fixed amount every month.

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• On Grade 8