A budget is many things – plans for the future, records of the past, promises to yourself. A budget also codifies some sort of system, and there are many systems out there. Not all budgets can be the same, nor are they all created equal. Different people have different needs and those needs change over time. There is no one-size-fits-all solution for personal finance.

However I do believe there are things that all good budgets will have in common.

1. Track every cent

A budget is a tool that helps you achieve the first rule of personal finance: spend less than you earn. To do this the budget needs to record how much you spend and how much you earn.

How much you earn should be relatively easy to track – it usually comes from a few sources in known amounts at regular intervals. Spending is harder to track. It goes towards dozens of different expenses in varying amounts at many different and overlapping frequencies. If a budget is needed it is typically because there is no accountability on spending and it is outstriping earning.

The first priority of a budget is to create an accurate picture of where the money goes. It must make a record of where everything is spent – every single cent. One reason you do not know where all the money is going is because a large percentage of it is going in small, incidental spending that does not register as an expense. It might be the $3 coffee every morning or the magazine picked up while waiting in line at the checkout register.

You have to record spending yourself, preferably as you do it. The budget should help you by making it as quick and painless as possible.

2. Account for commitments

Many expenses come regularly. As such they are predictable and a budget should take care of the predicting.

One wrinkle in budgeting is that not all regular expenses occur at the same frequency. Most will be out of step with the rhythm of the budget. A budget must account for the effects of quarterly and yearly bills while working on a monthly basis.

3. Plan for the future

When an expense is not regular it can at least be planned for. This could be saving for a new car or putting aside an emergency fund.

A budget should incorporate savings plans for these planned but irregular expenses. Such plans typically involve a target and a time frame, turning a large expense into a series of smaller ones.

And when the plan is complete it can be dropped from the budget which leads to the next point.

4. Adapt

Circumstances change. The unexpected happens. Even without calamity the act of scrutinising spending will change spending habits. The budget you make today will not be the budget you need in six months time.

A budget cannot be static. It must adapt to changing habits and absorb disasters without becoming unusable. It should not get weighed down with the dead wood and scar tissue of budgets past.

5. Recount history’s lessons

In my mind this is a contentious point. For years I have kept monthly budgets in spreadsheets, carefully archiving each month as it finished. I have years of records there.

But I never look at them.

What I do at the end of the month, before I close the spreadsheet for the final time, is try to discern patterns and warnings for the coming month. Are we consistently over spending in a certain area? Has a new regular payment started? I use the information to alter next month’s budget or spending.

The leassons need not all be bad. Seeing you have your spending under control, that you are finally ahead of your debts, are important too. Every small achievement encourages more.

The important thing is history’s lesson, not the history itself.

So a budget needs to show you how far you have come, and point out what could be done better. In this way it encourages change.

What a budget cannot do for you

Go back over the points above and you will see that all the budget can do is inform, remind, plan and teach. The action has to come from yourself. The change has to come from yourself. Without acting on what you learn, without changing your habits, a budget is just pushing numbers around.

What do you think? Have I missed anything? Or am I just plain wrong? Let me know in the comments.