Balancing a budget

0:00- [Instructor] In this video, we're going to talk about an important tool for managing your money, and that's a budget. We're in particular gonna talk about balancing a budget, which means using the budget to try to make sure that you're not spending more money than you are actually bringing in.

0:16So let's look at an example. So first, let's think about the money that you will be bringing in, and we'll do a monthly budget. So this is a monthly budget over here. And let's say in a given month, first of all, let's think about our income. This is money that is literally coming in.

0:35It starts with the word in, income, it's incoming to you. It's going into your bank account or into your pocket. And let's say you have a paycheck for your job and after paying taxes and everything, so your net income here is $2,000. $2,000 a month. And let's say you're also doing a little bit of a gig on the side dog walking.

1:04You do that just for fun and you're making, or it adds a little bit to your income as well, so it's useful. Let's say you make another $200 from that. So the total money that's coming in to you, your income here is $2,200. $2,200 total. Now, we know that your savings isn't just going to grow by $2,200 every month because you also have expenses.

1:30So let's think about those expenses. This is the money that you're spending. The money that is going out. I guess you could call it, well, outcome is a different word, but this is income and this is the stuff that's going out. And so first, let's think about, well, think about our largest expenses.

1:48Usually housing is one of our largest expenses. So I will put rent here. And let's say we are spending $1,500 a month on rent. Let's say we have our car payment. So we borrowed some money to buy a car and we have to pay a monthly amount for that car. So let's say that that is $400.

2:15Let's say that I, well, I need food to live. So I have groceries over here and let's say I spend 200 a month on groceries. And let's say I like eating out, going to movies and let's call that leisure or entertainment. I could call it a lot of different things.

2:40And let's say I spend 400 a month on that. 400 a month, now, what are my total expenses? Well, I could just add everything up. 1500 plus 400 is 1900, plus another 200 is 2100, plus 400 is $2,500. So my question to you is, is this a balanced budget or is this a good situation to be in?

3:09Well, if in a given month I'm bringing in $2,200 and I'm spending $2,500, that means the amount that I have at the end of the month is $300 less than the amount that I started the month with. So this is not a situation that I can keep doing. Every month, $300 is going out even after my income, 'cause I'm spending $300 more.

3:30So this is not a balanced budget. So in order to balance our budget, ideally we more than balance our budget so that we can have a little bit of savings every month. But if we just wanted to make sure that we're not sinking in terms of how much money we have, we wanna at least get our expenses down to be equal to our income.

3:48Once again, ideally, it's even less than our income so that we can put some money away for a rainy day or to maybe have a down payment on a house or something else. But at minimum, we want to reduce our expenses by $300. Now, when we look at this, where would you think about reducing those expenses?

4:06Your rent, you're not gonna be able to change usually on a month to month basis. You could start looking for another maybe more affordable apartment, and same thing as with your car payment. These tend to be pretty fixed things. You could try to buy fewer groceries, but $200 isn't a huge grocery budget.

4:24If I were you, I would look at this part of your budget right here. Maybe instead of spending $400 a month on leisure, maybe you could spend $100 a month on leisure. So if this went from $400 to $100, then you would have a balanced budget. Or maybe you say, no, I really like going out, going to restaurants, going to movies, I'll cost cut a little bit, but not a ton.

4:48So you could say, maybe I'll go down to $300, but that still wouldn't be a balanced budget. Instead here we would be at $2,400. And so if you wanted to balance this budget the other way, you need to find more income. So maybe you need to do some more dog walking.

5:06So double your dog walking, do twice as much and if you can get to $400 of dog walking, then your total would be 2,400 and your budget will be balanced. So big picture, a budget is just a way of looking at your income and your expenses, what's coming in, what's coming out and trying to see how they compare.

5:27Ideally, you wanna balance 'em, control your expenses so they're not too large and if you can, and you have enough time, maybe thinking about how you could get your income up. But usually for most folks, it's about the expenses and thinking about the things that you need and those are probably things like rent, car payment, groceries.

5:45Now you don't need a super fancy car. You need a car that gets the job done. You don't need a super fancy apartment. You need an apartment that gets the job done. But leisure is usually a place where you might be able to think about, well, do I need to spend quite as much?

5:58But that's up to you in thinking about how you're going to balance.