Money Matters: Budget Basics

The concept of a budget is simple: It's merely a planning tool that allows you to track your income and compare it to your expenditures in order to set and reach your established goals by the end of a specified time period, such as one month. If your income, outflow or planning are misaligned, you make an adjustment accordingly.

So, what does this all mean? Let's say your monthly income (revenue) is $1,000. The next step is to determine your monthly outflow (expenditures) and subtract them from your income. If there is any money remaining, this can be added to your savings account or used for discretionary spending.

Understanding Fixed and Variable Expenditures

There are two types of expenses that you (or your company) will have every month: fixed and variable expenditures.

Fixed expenditures are easy to determine and project because they are the same every month. Expenses like your mortgage or rent, car note or insurance premiums are fixed; they are a pre-established amount each month. Knowing what these are helps you to determine in advance which portion of your income is already committed.

Variable expenditures, on the other hand, are different each month and are, therefore, a little more difficult to predict. However, these are also the expenditures which provide you with the most control over your budget. The cost of items, such as food, gasoline, credit cards and entertainment, can fluctuate based upon your income. Depending upon how much more or less income is available, you have the option of spending more or less on these items.

The 60-Percent Solution

Whether you're budgeting for yourself or for your employer, monitoring your budget is the only way to ensure that you're spending and saving wisely.

According to money guru Richard Jenkins, the simplest way to budget is to use the 60-percent solution. This concept basically states that all your essential spending - taxes, rent, food, clothing, insurance - should come from the first 60 percent of your pretax income. The balance, grouped into 10-percent quantities, is then committed to savings - retirement, long-term, and short-term or emergency - and entertainment.

One crucial element of establishing a monthly budget is to know in advance how your income is being spent, which ensures that you can meet your financial obligations. And by using the 60-percent solution, you create a 40-percent safety net. Monies, experts say, that you can place into various savings plans or spend on items that you want. According to Jenkins, "The key is creating a sustainable structure for your finances - one that balances spending and income and that leaves enough room to handle the unexpected."

Lastly, if you're trying to save up for something special and need help compiling a personal budget, Citibank offers a free online budget builder.