Top Three Terms to Understand When Creating a Budget

Top Three Terms to Understand When Creating a Budget

Understanding and creating a budget is crucial for achieving and maintaining financial security. Without one, it can be easy to overspend and find yourself in debt. A budget helps you see where your money is going and allows you to adjust your spending as needed. It also helps make sure you’re putting money towards the things that matter most to you. Whether it be saving for a house, paying off debt, or building an emergency fund.

See below for the top three terms and the difference they make when understanding budgeting.

Fixed vs Variable Expenses

  • Fixed expenses are those that stay the same month to month. Examples include rent or mortgage payments, property taxes, and cell phone bill.
  • Variable expenses include gas, groceries, utilities, and home maintenance.  They fluctuate from one month to the next, making it difficult to budget for.

Gross Pay vs Net Pay

  • Gross Pay is the amount you earn before taxes, benefits and deductions are withheld
  • Net pay is the amount of money you take home after all deductions have been made

Good Debt vs Bad Debt

  • Good debt can help increase your wealth over time and benefit your financial health in the long-term.  An example of good debt is a mortgage. Making consistent mortgage payments helps build equity in your home which leads to an increase in your net worth.
  • Bad debt can be a financial burden and take a toll on your wallet.  Using high interest rate credit cards for discretionary purchases and not paying off  the balance each month is a prime example.

Budgeting allows you to prioritize expenses, avoid debts, save for emergencies and achieve financial goals. Understanding the differences between expenses, pay, and debt allow you to take control of your budget and strategically plan for the future. Reach out to our team below to start a conversation regarding your finances.