The following clip was originally published in WalletHub’s Sept. 2, 2026 article “What is a Budget?” and features the following input from John Solow. For the full article, please visit: https://wallethub.com/edu/b/what-is-a-budget/142825#expert=John_Solow
From an economist’s perspective, every household balances it’s budget over it’s lifetime, in the sense that total lifetime earnings (including inheritances) equals total lifetime spending (including bequests), but that’s not very helpful to most people. The practical question is how (or more importantly, whether) to balance income and spending over shorter periods of time.
While politicians are fond of saying, “every family knows it can’t spend more than it earns each year, and government should do the same,” in fact families (and businesses) spend more in some years than they earn. It’s called borrowing, and if done intelligently if is a good thing. Whenever a family takes out a mortgage to buy a house, it likely spends more that year than it earns that year. If families were limited to spending each year only what they earn in a year and could not borrow to buy houses, only the very wealthy or those that save for a very long time would be able to own homes.
Businesses likewise borrow (issue bonds) in order to finance capital investments. Such borrowing is risky, of course – the business expects the investment to pay off sufficiently to pay off the bonds including interest with money left over for profit, but that doesn’t always happen. The same is true of household investments like a house – families hope that homeownership provides benefits that exceed those of renting (including possible capital gains if they sell the house), and that their future incomes will provide them the wherewithal to make the payments, but that doesn’t always happen either.
Of course, families could incorporate borrowing costs into their budgeting over time (when are you going to borrow, for what purpose, how and when you are going to repay with interest) – that’s called capital budgeting and businesses do it all the time – but that is typically beyond ordinary families trying to balance their monthly spending with their paychecks.