Defining the Parts that Make Up a Budget

The key elements that make a budget

Income

Income refers to money that comes in that you can use to cover expenses and save up to achieve your goals.

At this stage, that usually includes:

• Allowance
• Money from a part-time job
• Gift money

Smart Money Tip: Keep income on your mind

Income is essential. Making money shouldn’t be the only thing you think about in life, but you should think about it often. You should also factor it in when you’re making decisions about your life. You can never earn too much income!

Expenses

Expenses refer to anything that you use your income to pay for. At this stage in your life, you can make things simple. Just divide expenses up between necessary expenses (needs) and discretionary expenses (wants).

Here are some examples of each type of expense that you may already have:

Necessary expenses:

• Saving for specific goals, such as a college fund
• Bills that your parents ask you to pick up or cover
• Electronics or clothing that you need for school

Discretionary expenses (things you want and buy at your discretion)

• Money for eating out or going out
• Purchases you make in apps or games
• Clothing or electronic devices that you don’t need for school but just want to have

Two types of necessary expenses

As you get older and become financially independent, necessary expenses will eventually get split into two categories: fixed and flexible. Both are necessary, but there’s a difference in the cost.

Fixed expenses stay constant, so you can expect to spend the same amount every month. Examples include:

• Car payments
• Auto insurance
• Student loan payments
• Rent

Flexible expenses change from month to month, so the cost can vary. This can include:

• Electric bills
• Gas costs for your car
• Groceries
• Car maintenance and repairs
• Clothing

Now let’s make your first budget!

Step 1: Define Your Income

First, you need to define how much income you get each week or month—whichever fits your budget the best. Use the worksheet below to write down your income, so you know exactly how much money you have coming in.

Step 2: Set your expenses

Now you need to set your expenses. For fixed expenses, this will be easier because they have a set cost. For flexible and discretionary expenses, you will need to set spending targets. This is a target amount of money that you spend each week or month on a certain expense. You should always try to spend less than that target. If you are tracking your spending day-to-day and see you are approaching the target, it’s time to slow down and try to stop spending.

Smart Money Tip: Learn to set spending targets

Whether it’s a grocery budget or a game budget, it’s important to set limits.

1. Look at how much money you shelled out for particular expense over three different months.
2. Take an average of what you spent over that 3-month period.
3. Set this as a spending target and monitor monthly spending to stay below that amount.

Example: Let’s say you spend money regularly on apps. Too many in-game purchases can easily drain all your funds. So, you set a target.

Let’s say you earn about $30 per month pet sitting and walking dogs around the neighborhood. You save some of the money to buy your first car and some for college, but the rest is yours to spend. So, you might decide to set a spending limit of $5 for apps.

Once you set the target, you make an effort never to exceed it. If you make a few $0.99 purchases early in the month, try to slow down. If you reach the end of the month and you haven’t spent anything, you might choose to get a bigger purchase… or just pocket the savings for something else!