What Does It Mean to Have a Balanced Budget?

What Does It Mean to Have a Balanced Budget?

Definition

A spending plan is considered balanced if the total amount spent is less than or equal to the amount of money brought in by the household. To put it another way, a budget that is balanced will indicate whether or not you are living within your means.

A balanced budget can help people, companies, and even government agencies avoid taking on further debt, which is a benefit that can be enjoyed by all of these entities. This article will take a more in-depth look at how they operate.

The Meaning of a Balanced Budget, Along with Some Real-World Examples

A balanced budget is a type of financial plan in which your expected spending for the year is the same as your expected income for the year. This means that there is no money left in the budget.

An alternative definition of “balanced budget” is any period in time during which a budget is not experiencing a deficit. This is also considered a balanced budget. To put it another way, your budget is considered balanced as long as it either maintains a surplus of income or maintains a zero deficit.

For instance, Michael and Jessica have a balanced budget if their annual expenses are equal to or less than their income and their revenue is greater than or equal to their expenses. 

If they bring in $75,000 a year but only spend $70,000, then they have a balanced budget. In this scenario, they have the option of putting the additional $5,000 in their budget toward either the reduction of their debt or the achievement of their savings objectives.

On the other hand, if they spent $80,000 each year, their budget would be out of balance since they would be spending more money than they brought in each year. And in this case, it’s very likely that they’ll have to borrow money to keep up their standard of living.

The Process Behind a Budget That Is Balanced

It makes it easier to avoid going into debt and achieve your savings objectives, having a budget that is balanced is a key component of being financially secure.

A budget deficit occurs when a person or organization spends more money than they bring in. To make up for the shortfall, you will need to borrow money from another source, such as a credit card or a loan, for example. This will add more debt to your total. And if your debt load gets too high, it can wreak havoc on your ability to maintain a stable financial situation.

It is possible to have what is known as a budget surplus if, after paying for all of your expenses, there is still some money remaining. This is a really positive sign because it indicates that you are living within your means and not taking on any additional debt in order to fund your lifestyle.

Below you will find three examples of budgeting so that you may see these concepts put into practice.

  • A Budget That Is Balanced And Is Breaking Even
  • Prior to this phase, earnings were $3,000
  • Living expenses of $1,750
  • $500 in debt repayments
  • wants (shopping, dining out, travel, etc.).
  • $750
  • $0 remaining balance

In this scenario, the difference between your income and all of your costs is $0. This is wonderful news since it indicates that your budget is balanced and that you are not spending more money than you earn. Congratulations!

Do you see an issue with the way the money is being spent? There is no spare cash available for you to put toward your savings objectives. You won’t be adding to your existing debt, but you won’t have any extra money to put away either, which is a situation that should be avoided if at all possible.

A Budget That Is Balanced While Having a Surplus

  • Prior to this phase, earnings were $3,000
  • Living expenses of $1,500
  • Debt repayments of $550
  • wants (shopping, dining out, travel, etc.).
  • $500
  • $450 is the remaining balance.

I

n this case, you have a budget that is balanced to perfection; your income is greater than your spending, but you still have some money left over for your savings goals.

You could use the extra $450 to start a savings account for unexpected costs, pay for your child’s college education, save more for retirement, or put a down payment on a house.

A budget that is unbalanced

  • Prior to this phase, earnings were $3,000
  • Living expenses of $2,000
  • Debt repayments of $600
  • wants (shopping, dining out, travel, etc.).
  • $600
  • The remaining balance is $200.

You are in a position where you are spending more money than you are bringing in at the moment. Every month, you rack up a little bit more debt, and you’re getting really worried about your financial situation.

The good news is that after contrasting your income to your expenses, you now have a more distinct understanding of the areas in which you may reduce your spending. If you’re having trouble making ends meet, you might want to think about cutting back on the money you spend on “wants” or getting a part-time job.

Advantages to Maintaining a Budget That Is Balanced

The primary advantage of having a budget that is in balance is that it eliminates the need to take on further debt. It can assist you in putting a halt to unnecessary spending as well as point out areas in which you can reduce expenses, raise your income, and save more money.

Taking the time to balance your budget can be helpful in identifying areas of your finances that may have room for improvement, especially if you are someone who lives from paycheck to paycheck or has a hard time getting the hang of budgeting in general. Because of this, you will feel like you have more control over your finances and be in a better position to work toward your financial goals.

It is possible that families that routinely spend more than they make as a result of poor earnings and other problems will not be able to maintain a balanced budget, despite the fact that such a budget can be extremely helpful. If this is your situation, speaking with a free financial counselor may be able to provide you with the resources you need to improve your financial situation.

How to Make a Budget That Is Already Balanced

The process of comparing your income to your expenditures and ensuring that they are proportionate to one another is what is meant by “balancing your budget.” The procedure is as follows:

1. Determine Your Total Earnings

First things first have a look at how much money is coming in each month by going through your monthly income. This sum may come from a job, a side business, financial help, social security, alimony, or any other source of income.

If you have a variable income, you may anticipate how much money you will make each month by taking the total amount of money you made in the previous year and dividing it by 12.

2. Calculate Your Expenses

Your next step is to compile a rough estimate of your monthly costs. Examine your bank and credit card statements to see how much you spent on various items, such as your home, car, food, and insurance. While some of these costs will remain constant from month to month (referred to as “fixed”), others may change on a monthly basis (referred to as “variable”). Make an effort to come up with an accurate estimate of how much money you spend in each category every month.

When you are calculating the total cost of your purchases, it is important to remember to include unusual expenditures like oil changes, birthday gifts, and other sporadic acquisitions. For example, homeowners’ insurance is often paid twice a year.

3. Evaluate Your Situation

To complete this part of the process, all you need to do is deduct your expenditures from your income to determine whether or not the result is a positive or negative number.

If you have a positive balance, it means that your total expenditures are less than your total earnings. You can apply this additional money toward any of the goals that you have written down, such as creating an emergency fund, paying off debt, investing for the future, putting funds toward your next vacation, or any of the other things that are important to you.

If you have a negative balance, it indicates that your monthly expenses are higher than your income and that you are running a deficit. Find strategies to reduce your spending and/or boost your income so that you can get your finances back on track and achieve financial equilibrium.

Thankfully, long gone are the days when you had to manually keep your budget in balance all by yourself. Because of advancements in technology, you now have the option of using a budget app or spreadsheet to expedite the process, which will save you both time and effort along the way. You can also save money and keep your spending under control by using the built-in budgeting features that many banks provide these days.

The United States Federal Government and Maintaining a Balanced Budget

A government has a balanced budget in the United States when the amount of money it spends (on things like healthcare, Social Security, infrastructure, and interest on the federal debt, among other things) for the fiscal year is equal to the amount of money it brings in (from taxes and other sources).

It is essential to have a budget that is balanced since it contributes to the upkeep of a healthy economy. In practice, however, it is difficult for nations to have perfectly balanced budgets; instead, they frequently operate in either a surplus or a deficit most of the time.

Since 1947, the United States of America has presented a balanced budget 12 times. The United States government last reported having a balanced budget in the year 2001.

Key Takeaways

When your income is the same amount or more than your expenses, you have what’s known as a balanced budget.

Having a balanced budget is important because it lets you pay down your debt and live within your means.

Having a budget that is balanced is one strategy that a lot of nations adopt to help keep their economies robust and to stop their debt from ballooning to unmanageable levels.

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