Balanced Budget: What it is and How it Works


Calculating your spending, income, and savings can help you determine if you have a balanced budget. If your expenses are less than your income and savings are higher than your expenses, you at least have a budget that’s on the right track.

Keeping a balanced budget means that your income is at least as much as all of your expenses combined—but ideally, it’s a little more. If you save, your net income (the amount you have leftover after you pay for living expenses and debt) is greater than zero.

If your monthly income is $6,000, and your monthly expenses are $4,500, then you’re ahead by $1,500 for the month. However, if your monthly bills total more than your income, that’s when you get into trouble.

What is a Balanced Budget?

A balanced budget is a budget where income is the same or higher than expenses. “Balanced-budget” can also refer to any point in time when a budget isn’t experiencing a deficit, as long as you’re breaking even or have money leftover. In other words, if your income and expenses are equal, it’s a balanced budget.

It is where your income is equal to or greater than your expenses. We consider a budget “balanced” when there’s money left over after paying all of your bills each month.

Keeping a balanced budget is one of the most common strategies for getting out of debt (and staying there). By making sure your expenses are equal to or less than your income, you’ll know what’s coming in and where it’s going. This will help you to avoid debt and plan for unexpected costs, like an emergency fund.

Balancing your budget can seem daunting at first, but if you’re living paycheck to paycheck or overspending consistently, it may actually be necessary to break out of the cycle and get out of debt.

But how do you balance a budget? How do you know if your budget is balanced or not? And how much should you be spending on groceries, rent and other expenses?

How a Balanced Budget Works

If you’re living paycheck to paycheck and struggling to juggle your bills, creating a budget is going to be one of the most important steps you can take toward restoring your financial health.

A balanced budget isn’t just a quick fix—it’s a way of life. Think of it as a spending plan for your money. It allows you to create short- and long-term goals and motivate yourself to save more. It means living within your means and spending every dollar with purpose. Above all, it’s a path to financial security that will lead to greater peace of mind.

Your budget is one of the most important tools you have to help you get financially secure. A personal budget or home budget is a finance plan that allocates your personal income towards routine expenses, savings, and future goals. On a monthly basis, the amounts you budget will either add up to more than your income (surplus) or less than your income (deficit).

Important Budgeting Examples To Check Out

Balanced Budget That Breaks Even

  1. Starting Income: $3,000
  2. Living expenses: $1,750
  3. Debt repayments: $500
  4. Wants (shopping, dining out, travel, etc.): $750
  5. Remaining balance: $0

In this situation, your income minus all your expenses equal $0. This is nice as you are not spending above your means.

A balanced budget is one that has no surplus or deficit, but that doesn’t mean that you have a lot of money left over at the end of the month; it simply means that your income equals your expenses, and you’re not spending more than you earn. But when you create one of these budgets and it remains balanced, remember that your budget has no room for savings.

But while it’s great to break even, if you want your budget to work for you and help you achieve your goals, you need to find ways to bring in more cash than you spend on living expenses and wants. That way, you can pay off debt fast, save up for important life milestones like retirement and a home, or see the world by traveling for several months straight.

An Unbalanced Budget

  1. Starting Income: $3,000
  2. Living expenses: $2,000
  3. Debt repayments: $600
  4. Wants (shopping, dining out, travel, etc.): $600
  5. Remaining balance: -$200

In this situation, your earning is lower than your expenses. Your finances are becoming stressed as you accumulate more debts each month. However, the positive side to this is that by comparing your expenses to your income, you’ll be able to see which aspect to cut back. Aside from reducing your avoidable expenses, you may also want to get a side job for more money to meet up to your expenses.

Benefits of a Balanced Budget

By creating a personal budget or family budget, you can see how much money you’re bringing in and what you’re spending it on over a period of time.

This gives you insight into where your money should go and if you need to make any necessary changes so there’s enough left each month to cover expenses, build savings and have money left over for fun.

A balanced budget keeps your income and expenses in balance (so you don’t get into debt), prevents overspending by showing you where you can trim down and save, and gives you a better handle on how to reach your financial goals faster.

How To Create a Balanced Budget

With your budget balanced, it simply means that you can align your income properly with your expenses.

Here’s how to go about it.

Step 1: Add up your total income

Each month, take a look at your earnings — and spendings. See how much money is coming in and how much is going out of your bank account. This will help you figure out how much money you can put into savings, toward debt payments, or pay down other things this month.

Your earnings could be what you receive from work, Social Security, a side job, financial support, or any other stream of income.

2. Draw an estimate of what’s going out

After adding up your income, it’s time to split your budget into different categories. Create a section for fixed expenses — must-haves like rent, food, water, heat and medical insurance. These are costs you know will stay relatively the same from month to month.

3. Find out where exactly what your financial position is

How much money is coming in? And how much is going out?

Before you finally start having a structured budget and begin to make plans towards your future, you must be able to review your income against your expenses. And find out if your cash flow is positive or negative.

Conclusion: With a positive balance, you’re spending less than you earn. You can take this extra money and use it toward any of your goals, such as paying off debts, building an emergency fund, investing for the future, or planning towards your next vacation.  With a negative balance, your spending is dwarfing your earnings. Consider ways to trim your expenses or boost your revenue to help you balance your budget.
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