Basic Budget Terminology You Should Know
Estimated reading time: 8 minutes
Learning basic budget terminology should be one of the first things to do before starting a financial journey.
Before I began this blog, I read cover-to-cover Blogging For Dummies and highly recommend it.
Budgets work, and I don’t care what anyone has to say about them who dislikes them.
Without a budget, we would not be debt-free and living a life where we owe nothing to anyone.
Although we’ve learned insurmountable financial information, we continue learning budget terminology year after year.
Today, I wanted to review basic budget terminology for anyone familiar with budgeting or those who like finance education.
Understanding How Budgets Work
You might be here because I asked you to read this post before beginning my Simple 10-Step Mini-Budgeting Series.
However, you might have landed on this page because you wanted to learn more about budgeting before diving in.
Either way, you’ve made a wise decision because it’s essential to know how to keep the boat afloat so you don’t sink it.
Canadian Budget Binder fan Tracy Miller wanted to share “cash envelopes” as budget terminology she feels everyone should know about.
By using envelopes, Tracy created a budgeting system that works for her, and you can too.
Related: How to Create a Monthly Budgeting System that Works
Cash envelopes have changed everything about budgeting for me.
I budget every beginning of the month plus weekly.
If I need anything, I have the money put aside for it, including an emergency.
I don’t have to go into debt to take care of it. It’s strict, but it gives you so much more freedom.
Tracy Miller/CBB Facebook
Basic Budget Terminology Education
The benefits of using a budget are massive, especially if you want to get out of debt.
It’s critical to arm yourself with the knowledge to help you navigate the process more efficiently.
You will find all these budget terms throughout the Canadian Budget Binder blog, so here’s your kickstart.
These are by no means an exclusive list but those you may encounter during your budgeting journey.
1. Budget
A budget tracks your income vs. expenses and is also a way to track your net income.
2. Net Income
Net Income is the money deposited into your bank account after taxes.
3. Gross Income
Gross income is your earnings before taxes or other deductions are taken off.
4. Net Worth
Net worth adds up your assets (what you own) and then removes your liabilities (what you owe), giving you a net worth number.
5. Projected Expenses
Projected expenses are upcoming bills or purchases that have to be paid at some point during the year and are not part of the monthly budget categories.
6. Variable Expenses
Variable expenses can go up or down in cost based on interest rates, price adjustments, weekly grocery sales, etc.
They are costs that change as the quantity of a business’s product or service changes.
7. Fixed Expenses
Fixed expenses are bills that do not change, so you know how much you will pay each month.
For example, your rent or mortgage payment is a fixed expense.
8. Zero-Based Budget
The zero-based budget leaves no money at the end of budgeting as it’s all got a place.
Every dollar you earn has a role in your budget; once it enters, it doesn’t leave.
9. Budget Categories
You create budget categories to use to track and pay bills and expenses.
For example, Grocery, Hydro, Gas, Mortgage, etc.
10. Pay Yourself First
Paying yourself first means to include yourself in the monthly budget so that you are saving or investing part of your income.
11. Credit Score and Credit Report
Consider your credit report, your report card from elementary school, but the part that explains the marks you were given, so a history.
A Credit Score, on the other hand, is the actual mark you get or score; in this case, it is three numbers long.
12. Debt Repayment Plan
A debt repayment plan, in simple terms, is a guide that explains how you plan to repay your debt.
13. Liabilities
Liabilities are the debts you whether it’s a company or personal.
For example, you owe the bank for your mortgage and a parent for a personal loan.
14. Asset
An Asset you own is worth money if you sell it.
A house would be an asset, jewellery, investments, vehicles, etc.
15. Balanced Budget
A balanced budget is where the total income earned pays for your planned expenses.
It can also mean spending less than you earn.
16. Credit Card Debt
You will have credit card debt when you charge money to a credit card or get a cash advance.
The amount of credit card debt you have must be paid in full each month.
Otherwise, the debt carries to the next month and will include an interest charge.
17. Consumer Price Index
The consumer price index (CPI) tracks how much the average Canadian household spends and how that changes over time. At the Bank of Canada, we use it to target inflation.
18. Budget Notes
You leave these notes around your budget or in your budget binder to refer back to when needed.
19. Cost Of Living Adjustment (COLA)
A cost-of-living adjustment (COLA) is an increase in pay or benefits designed to keep up with the rising costs of goods and services due to inflation.
COLAs help keep people’s earnings and living costs in proportion.
A cost of living pay adjustment is a change in income or benefits corresponding to the current living cost in a particular region.
20. Current Year
The current year is a financial year that has begun but has not yet ended.
21. Debt Limit
A debt limit is the maximum amount of money a person can borrow or spend.
22. Invoice
An invoice is a document or bill given to a buyer that needs to be paid.
23. Bank Account
A bank account is managed by a bank or other financial institution, such as a credit union.
In banking, an account refers to an arrangement by which an organization, typically a financial institution such as a bank or credit union, accepts a customer’s financial assets and holds them on behalf of the customer at his or her discretion.
Related: Why married couples should have four bank accounts.
24. Balance Owing
The balance owing is the difference between any amount credited or debited to your account.
25. Minimum Payment
The minimum payment is the least amount of money you repay on a debt that is owed.
26. Interest Rates
An interest rate is the money you owe or must repay when you borrow money.
For example, if you borrow money for a mortgage from a bank, you must pay the amount you borrowed plus an interest rate set by the bank.
Other examples are credit cards, student loans, lines of credit, etc.
27. Goals
Goals are achievements you’d like to reach at a point in time during your life.
You can set long-term goals over 5 years or short-term goals 1-5 years.
For example, a long-term goal would be to pay off your mortgage in ten years.
A short-term goal would be to pay off your credit card in one year.
28. Balance
A balance is the amount of money you owe or still need to pay.
It can also mean the net amount of money in a bank account after debits and credits are accounted for.
29. Savings
Savings refers to the money a person has left over after subtracting their consumer spending from their disposable income over a given period.
A net surplus of funds for an individual or household after all expenses and obligations have been paid is also called savings.
Savings are kept in cash or cash equivalents (e.g., bank deposits), which are exposed to no risk of loss but come with correspondingly minimal returns.
However, savings can be grown through investing, which requires that the money be put at risk.
30. Emergency Savings/Rainy Day Fund
The Emergency Savings Fund is not meant just for rich people. It’s savings for everyone who doesn’t want to be left stressed about money in a time of need.
Think about it as a rainy day fund where you must pay for something unplanned.
31. Receipts
A receipt is given to someone that details what was purchased by the consumer.
The importance of the receipt when budgeting is massive, so we should always ask for them.
Using receipts to budget your expenses is necessary to create an accurate monthly budget.
32. Debt Default
Debt default is when you fail to repay a loan you signed or co-signed for in Canada.
Example: Bank (lender) lends you (borrower) $5000, which needs to be paid back monthly at a specific interest rate.
33. Historical Expenses
Using a Historical Expense Tracker to build a budget is the most crucial step toward accuracy by documenting where your money was spent.
Historical expenses use documentation of past expenses to build a better future budget.
34. Short-Term Savings
Consider short-term savings as a means to purchase something shortly.
I consider savings goals with a short lifespan of months and five years.
35. Budget Summary
A budget summary comes after you’ve pulled all your budget category numbers, including debt and income.
36. Miscellaneous Expenses
With budgeting, it’s impossible to predict every expense you will have over the year.
Miscellaneous expenses are a budget category called the ‘junk drawer‘ of budgeting.
37. Irregular Expenses
These expenses may pop up once, twice, or three times yearly that you must pay.
Most people don’t save for irregular expenses, which can mess up your monthly budget.
Ideally, you’ll want to save your irregular expenses each month until the bill comes due.
38. 50/20/30 Budget
The 50-20-30 budget spends 50% of income on needs, 20% on savings, and 30% on wants.
Budget Terminology Is Only The Beginning
Basic Personal Budget Terminology Everyone Should Know before beginning a financial journey to get rid of Debt and increase savings is a Must.
Don’t start down the path without knowing what you are doing or looking for.
Reaching a destination or goal is only attainable if you understand and follow the budgeting rules.
Lastly, another good read is The Ultimate Guide For Beginner Budgeting from A to Z.
Thanks for reading,
Mr. CBB
