What are state balanced budget requirements and how do they work?

Definition and Examples of a Balanced Budget

A balanced budget is a type of financial plan wherein your expected revenue for the year equals your expected spending, thus leaving $0 left in your budget.

  • Alternate definition: A balanced budget can also refer to any point in time in which a budget is not experiencing a deficit. In other words, as long as your budget is breaking even or has income leftover, it’s balanced.

For example, if Michael and Jessica bring home $75,000 a year but only spend $70,000, then they have a balanced budget because their expenses are equal to or less than their income. In this case, they can use the extra $5,000 in their budget to pay down debt or reach their savings goals.

On the contrary, if they spent $80,000 a year, they’d have an unbalanced budget because they’d be spending more than they make. And in this case, they’d likely be going into debt to sustain their lifestyle.

How To Create a Balanced Budget

Balancing your budget is simply the act of comparing your income to your expenses to make sure the two are in alignment. Here’s how to do it.

1. Add Up Your Income

First, review your monthly income to see how much money you have coming in. This could be money from work, a side hustle, financial aid, Social Security, alimony, or any other revenue.

If your income fluctuates, look at how much money you made last year and divide it by 12 to get a monthly estimate.

2. Estimate Your Expenses

Now it’s time to estimate your monthly expenses. Review your bank and credit card statements to identify each one—housing expenses, car costs, food, insurance, etc. Some of these costs will stay the same each month (“fixed”), while others will change each month (“variable”). Do your best to estimate how much you spend in each category every month.

As you add up your purchases, don’t forget to include less common expenses like homeowners insurance paid twice a year, oil changes, birthday gifts, and other irregular purchases.

3. See Where You Stand

For this step, all you have to do is subtract your expenses from your income to see if you get a positive or negative number.

If your balance is positive, you’re spending less than you earn. You can take this extra money and use it to build an emergency fund, pay off debt, invest for your future, put cash toward your next vacation, or any other goals on your list.

If your balance is negative, you’re spending more than you earn each month and operating at a deficit. To get back on track and balance your budget, look for ways to trim expenses and/or increase your income.

Gone are the days of having to manually maintain a balanced budget all by yourself. Thanks to technology, you can use a budget app or budget spreadsheet to speed up the process, saving you time and energy along the way. Many banks also offer built-in budgeting tools to help you save money and keep your spending in check.

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Why Does a Balanced Budget Matter?

In a word: debt.

The alternative to a balanced budget is to run what are called "overages." In the case of politics or business this is actually a standard practice. Those entities resolve that (typically) through bond offerings or bank loans. In the case of personal finance it's a bigger problem.

Credit for individuals is vastly more expensive than it is for an institution. If you spend more than you make on a monthly or annual basis you will eat through savings and potentially have to rely on credit cards and personal loans to cover the rest. Those are not consumer-friendly instruments however; at least, not when you rely on them for access to cash.

Keeping a balanced budget is a good way to avoid expensive credit card habits.

Understanding a Balanced Budget

The phrase “balanced budget” is commonly used in reference to official government budgets. For example, governments may issue a press release stating that they have a balanced budget for the upcoming fiscal year, or politicians may campaign on a promise to balance the budget once in office.

When revenues exceed expenses there is a budget surplus; when expenses exceed revenues there is a budget deficit. While neither of these is a technically balanced budget, deficits tend to elicit more concern.

The term “budget surplus” is often used in conjunction with a balanced budget. A budget surplus occurs when revenues exceed expenses, and the surplus amount represents the difference between the two. In a business setting, a company can reinvest surpluses back into itself, such as for research and development expenses; pay them out to employees in the form of bonuses; or distribute them to shareholders as dividends.

In a government setting, a budget surplus occurs when tax revenues in a calendar year exceed government expenditures. The United States government has only achieved a budget surplus four times since 1970. It happened during consecutive years from 1998 until 2001.

A budget deficit, by contrast, is the result of expenses eclipsing revenues. Budget deficits necessarily result in rising debt, as funds must be borrowed to meet expenses. For example, the U.S. national debt, which is in excess of $27 trillion as of November 2020, is the result of accumulated budget deficits over many decades.

Balanced Budget vs. Static Budget

It's important to distinguish a balanced budget from a static budget.

A balanced budget is what happens when you make sure to spend only what you take in. You don't have to set this budget in stone. Your only goal is the top line number: money in compared to money out. You can, and likely should, be as flexible as it takes to keep that ratio positive.

A static budget is one where your spending priorities never change regardless of month-to-month conditions. For example, assume that you create a monthly budget with $200 for groceries. Under a static budget you would never spend more than $200 on groceries no matter what the conditions.

A static budget can be a tool that you use to balance your personal spending, but it is not the same thing as a balanced budget.

Cyclically Balanced Budget

  1. An alternative to a budget that is balanced annually is a cyclically balanced budget. This concept counters the more rigid method of balancing a budget by calendar year in favor of balancing the budget based on business cycles. This means that budget surpluses and deficits should be governed by the economic cycle. When times are good and the economy is strong, budgets should run a surplus. When times are tough and the economy is poor, budgets should run a deficit. In theory, if the economy goes through both boom-and-bust cycles, then the budget should balance itself out. However, the practice of this concept depends on good times matching the bad ones.

How to establish a balanced budget that works

For any budget to be successful, it must be realistic while also setting expectations higher than the last financial cycle. It’s important to understand your organization’s historical progress, by measuring actuals against established goals with a forward-looking approach to create new goals and expectations for the coming year.

Creating a balanced budget involves reviewing current progress—what worked and didn’t work—setting new goals to establish a reasonable threshold for both expenses and revenues and adjusting as needed to reach your goals.

Balanced budget example

In this example, we look at what a successfully balanced budget would be for a government entity. Please note that the categories and amounts used below are for example purposes only.

Revenues (in billions)Federal income taxes: $3,500Business sales taxes: $2,750Excise taxes: $2,000Social Security taxes: $750Property taxes: $500

Total revenues: $9,500

Expenses (in billions)National defense: ($3,400)Medical expenses: ($2,900)Education expenses: ($1,500)Social Security benefits: ($250)

Total expenses: ($8,050)

Net revenues (surplus): $1,450

In the example, we see a balanced budget with an outcome of a budget surplus. As you can see, total revenues exceed total expenses by $1,450 billion—or $1.45 trillion—demonstrating that the government entity in the example earned more than it spent during the year. If the net revenues were negative—meaning total expenses exceed total revenues)—this would exemplify a budget deficit. This would require the government entity to review actual spending, identify opportunities to reduce expenses—increase savings—or increase revenue to balance the budget.

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