What does it mean to build a balanced budget? How can you get there? And should you even try?
Well… you certainly can get there, and you should most definitely try. Here's why.
What Is a Balanced Budget?
In a nutshell, a balanced budget is when you only spend as much money as you earn. You don't incur any debt or have any bills that go unpaid. At the end of each month (or year, depending on how you track your budget), you have spent no more than your income.
Budget balancing can refer to corporate accounts, in which the business ensures that its liabilities (expenses and debts) match its revenues (sales, investments and other forms of income). It is also commonly used in the context of politics. Many policymakers, particularly fiscally conservative ones, argue that the government should run a balanced budget by ending any and all deficit spending.
These politicians occasionally go so far as to propose a balanced budget amendment to the Constitution, which would require that Congress always match spending with revenue absent extraordinary circumstances. It is worth noting that, in practice, most of these policymakers ignore their own rhetoric when it comes time to vote for their own priorities. (This is a position that is better described as "deficits for me but not for thee.")
This article, however, will focus on personal finance. In your own financial life a balanced budget means the same thing. You have balanced your budget when you make sure that you're spending only what you earn; no more, and hopefully a little bit less.
Why Does a Balanced Budget Matter?
In a word: debt.
The alternative to a balanced budget is to run what are called "overages." In the case of politics or business this is actually a standard practice. Those entities resolve that (typically) through bond offerings or bank loans. In the case of personal finance it's a bigger problem.
Credit for individuals is vastly more expensive than it is for an institution. If you spend more than you make on a monthly or annual basis you will eat through savings and potentially have to rely on credit cards and personal loans to cover the rest. Those are not consumer-friendly instruments however; at least, not when you rely on them for access to cash.
Keeping a balanced budget is a good way to avoid expensive credit card habits.
What Are the Advantages of a Balanced Budget?
As noted above, the main advantage to a balanced budget is that you avoid incurring debt to pay your bills. As an individual, not having a balanced budget means spending more than you take in. But the catch is that the money has to come from somewhere.
So if your budget isn't balanced, you end up reaching for credit cards. Or you run late on bill payments, incurring expensive late fees and taking a hit to your credit score. Or you overdraw your checking account, once again incurring expensive fees.
No matter how you cut it, exceeding your monthly budget for consumer spending means finding a way to get short-term cash (or to put off short term bills). That's always expensive.
What Are the Disadvantages of a Balanced Budget?
What if, say, you'd like to buy a car?
A balanced budget prevents you from going into debt, but sometimes debt can be a good thing. At its best, debt allows you to access valuable and value-adding property years before you could buy it otherwise.
Take, for example, buying that car. At $20,000 it might take you years to save up for this vehicle, all the while you waste time and money taking buses, Lyfts and bumming rides off friends to get around town. By taking out a loan, you get all of that time and money back.
Which wouldn't be possible under a strictly balanced budget.
For the most part, you need to keep your budget balanced. Don't go into the red over a bar tab or a Bitcoin scam. Just make sure to know when it's time to spend wisely as well.
Balanced Budget vs. Static Budget
It's important to distinguish a balanced budget from a static budget.
A balanced budget is what happens when you make sure to spend only what you take in. You don't have to set this budget in stone. Your only goal is the top line number: money in compared to money out. You can, and likely should, be as flexible as it takes to keep that ratio positive.
A static budget is one where your spending priorities never change regardless of month-to-month conditions. For example, assume that you create a monthly budget with $200 for groceries. Under a static budget you would never spend more than $200 on groceries no matter what the conditions.
A static budget can be a tool that you use to balance your personal spending, but it is not the same thing as a balanced budget.
Example of a Balanced Budget
Let's take a look at a hypothetical balanced budget. To keep things simple, we will assume that this is our income after taxes.
Balanced Budget Period: Monthly
This means that in any given month we will only spend what we have earned that month. The alternative is an annually-balanced budget. Under that formula your monthly spending can fluctuate as long as you balance it by the end of the year.
January Expenses: $3,360
Rent - $1,500
Internet - $60
Phone - $80
Electricity - $40
Heat - $80
• Daily Spending
Groceries - $200
Transportation - $50
Coffee - $50
Sundries/Toiletries - $50
Books - $100
Clothes - $150
Car Loan - $200
Student Loans - $800
These are our hypothetical expenses for the month of January, clearly abridged.
January Income: $3,500
In this example, we make $42,000 per year after taxes. This comes to a monthly income of $3,500. This budget is balanced because our income exceeds our expenses. If that weren't the case, we would have to go back through our spending and make changes until it matched our income.
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