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A budget is a plan that shows what money you plan on spending.

Let's consider an example with a new car you want to buy. It costs $15,000 but you only have $5,000 in your savings account, and the trade in on your old car will get you only about $6,000, which leaves you about $4,000 short. What do you do?

You have been putting $100 per month into your savings account. That means that it will take you another 40 months (which is 3 years and 4 months) to save enough money so that you can buy that new car. You decide to wait the 3 years before buying the new car. This is a plan.

You could decide that you can save an additional $25 per month. This means that you can buy that new car in just 32 months (which is 2 years and 8 months). You have just modified your old plan and come up with a new one. But, for this plan to work you must actually be able to save that additional $25 per month. At this point you have a plan but you are not sure if it will work.

You have to be able to find the extra $25 per month in order to make the new plan work. Where will that money come from? You need to expand the plan to show how you can save the extra $25 per month and still meet all your other financial obligations.

In the above example we have seen a form of budgeting using a plan. This is the heart of what makes up a budget.

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