Alternate definition: A balanced budget can also refer to any point in time in which a budget is not experiencing a deficit. In other words, as long as your budget is breaking even or has income leftover, it’s balanced.
For example, if Michael and Jessica bring home $75,000 a year but only spend $70,000, then they have a balanced budget because their expenses are equal to or less than their income. In this case, they can use the extra $5,000 in their budget to pay down debt or reach their savings goals. On the contrary, if they spent $80,000 a year, they’d have an unbalanced budget because they’d be spending more than they make. And in this case, they’d likely be going into debt to sustain their lifestyle.
How a Balanced Budget Works
A balanced budget is an essential part of being financially secure because it helps you stay out of debt and reach your savings goals. If you spend more than you earn, you have a budget deficit. You then have to borrow money from somewhere else—through a credit card or loan, for example—to make up the difference. This increases your debt. And if your debt becomes too large, it can wreak havoc on your financial security. When you still have money left over after paying all your expenses, you have what’s called a budget surplus. This is a good thing because it means you’re living within their means and aren’t taking on debt to fund your lifestyle. Here are three budgeting examples so you can see these concepts in action.
Balanced Budget That Breaks Even
But do you spot the problem in the budget? You don’t have any leftover money to fund your savings goals. You’re not taking on more debt—but you also don’t have any extra money to save, which is bad if it becomes permanent.
Balanced Budget With a Surplus
You can take that extra $450 and use it to build an emergency fund, save for your child’s education, boost your retirement savings, or save for a down payment on a house.
Unbalanced Budget
The good news is that by comparing your income to your expenses, you now have a clearer view of where you can cut back. Consider reducing your “wants” spending or adding a part-time job to make ends meet.
Benefits of a Balanced Budget
The main benefit of a balanced budget is that it prevents you from taking on debt. It can help put a stop to overspending and show you where you can cut down expenses, increase your income, and save more money. If you’re living paycheck to paycheck or are struggling to get this budgeting thing just right, taking time to balance your budget can help you pinpoint areas of potential improvement. As a result, you’ll feel more in control of your finances and be in a better position to tackle your financial goals.
How To Create a Balanced Budget
Balancing your budget is simply the act of comparing your income to your expenses to make sure the two are in alignment. Here’s how to do it.
1. Add Up Your Income
First, review your monthly income to see how much money you have coming in. This could be money from work, a side hustle, financial aid, Social Security, alimony, or any other revenue. If your income fluctuates, look at how much money you made last year and divide it by 12 to get a monthly estimate.
2. Estimate Your Expenses
Now it’s time to estimate your monthly expenses. Review your bank and credit card statements to identify each one—housing expenses, car costs, food, insurance, etc. Some of these costs will stay the same each month (“fixed”), while others will change each month (“variable”). Do your best to estimate how much you spend in each category every month.
3. See Where You Stand
For this step, all you have to do is subtract your expenses from your income to see if you get a positive or negative number. If your balance is positive, you’re spending less than you earn. You can take this extra money and use it to build an emergency fund, pay off debt, invest for your future, put cash toward your next vacation, or any other goals on your list. If your balance is negative, you’re spending more than you earn each month and operating at a deficit. To get back on track and balance your budget, look for ways to trim expenses and/or increase your income.
The U.S. Government and Balanced Budgets
In the U.S., a governmental balanced budget happens when the money the country spends (on health care, Social Security, infrastructure, federal debt interest, etc.) is equal to the money it collects (through taxation and other avenues) for the fiscal year. A balanced budget is important because it helps maintain a healthy economy. But in reality, it’s difficult for countries to have a perfectly balanced budget—they’re usually operating in either a surplus or a deficit. The U.S. has had 12 balanced budgets since 1947. The most recent year the U.S had a balanced budget was 2001.
