1.2 So What's a Budget Anyway?


Lesson Objective: Understand what a budget is and how it should be used

A budget is a tool that helps you estimate your income and expenses. And like all tools, it's not very useful to you unless you pick it up and get to work. When combined with your transaction data, a budget becomes a model of your cash flow. Analyzing data on your spending habits is the best way to improve your financial decision-making. It allows you to compare the trade-offs of doing one thing versus another with your money.

When it comes to data, accuracy is a good thing, but only to a certain point. Models are not meant to be exact. When you see an outfit on a mannequin, it gives you an idea of what it might look like on you, but you wouldn't expect it to be exactly the same on your body. The same goes for budgets; they're just estimates that can be improved with real data, but reality will always be just a bit different.

In the next lesson, we will focus on a specific type of budget, the zero-based (or zero-balanced) budget.