Your grandparents may have used the envelope method by distributing their money into real paper envelopes marked with the name of the expense; i.e., electricity, food, rent, etc. When a bill was due, the money was in the envelope to pay it. It was a simple but effective way to ensure that their bills were paid and that they lived within their means.
With Budget you can create virtual envelopes for your expenses and set aside your money into those envelopes. When the mortgage bill needs to be paid, you will record the check from the “Mortgage” envelope. If you receive a claim reimbursement from your health insurance, you will make a deposit into the “Medical” envelope. When you get paid, you will distribute the money to your envelopes to fill them up again. You can even set up an allocation plan so each paycheck can be automatically distributed to your envelopes.
All your envelopes and their balances are always on the main screen — A glance tells you if you have enough money to pay the bills. It’s a lot easier than opening up real envelopes to see what’s inside!
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.