Is It Important to Plan Budget
5 minutes for reading
In this article, we will touch upon the issue of budget: what it is, what it is used for and how to plan it. Moreover, we will try to explain why a well-planned budget is such important for work with finance. Also, we will show you the advantages of an accurate budget.
Why budget is important
Budget is a financial plan for a certain timeframe that accounts for planned income and expenses. As a rule, a budget is drafted for a month or year.
Planning a budget implies a detailed list of expenses that gives a clear understanding of what can and has to be left out for your financial goals to be reached faster.
Explaining the importance of budget, we should at once enumerate its advantages. Firstly, a budget helps to manage your monthly expenses, makes you more disciplined, gets you ready for overcoming some crises, and stops you from making unwise financial decisions.
What is the goal of budget
Your budget demonstrates how much money a country, company, family, or person has and how much is to be spent on obligatory expenses. It must be noted that a budget is not a list of monthly earnings and spending; even such a table would be useful, though it will not help in reaching financial stability.
The goal of a budget is planning expenses and earnings over a certain time and then comparing your plan to what you actually got. This comparison and analysis of your statistics answers the basic questions:
- What have you spent your money on, and was it that necessary?
- Why your actual expenses have exceeded your plan and on what goods and services?
- How to follow your financial plan more accurately?
- What to do to minimise negative deviations of your budget from your plan?
What types of budget there are
A budget can be equally planned for a country and an individual who wants more order in their expenses. This document must fully represent the state of finance of a family or company. This means that the plan must include absolutely all sources of income and types of spending. The information must be true, valid, and full.
The process of financial planning is called budgeting and belongs to one of the following types:
- Personal budgeting is creating a budget for an individual for distributing income on spending, savings, and paying off debts. It accounts for previous expenses and debts. For example, a job is a source of income, while communal payments and rent are expenses. Here, we can also single out the category of assets: property, investments, and other savings or valuables that create a potential reserve for a budget deficit.
- Corporate budgeting is making a financial forecast for the nearest future that unites prospective income and expenses of various departments. It is the key element of integrated business planning. The process of corporate budgeting normally calls for a lot of effort, involving several employees. The final decision if left for the financial director.
Where to get started
As a rule, planning a personal budget starts from assessing one's income, tracking expenses, and getting rid of debts. A budget is called balanced when your expenses equal your income. If your spending exceeds your earnings, this creates a deficit, if vice versa — you have a profit.
Roughly, budgting includes several steps:
1. Calculate your income. Net income is the basics of any budget. Account for only the money you get on hand, minus taxes, pension contributions, and healthcare insurance.
2. Track your expenses. You need to understand what you spend your income for: communal payments, gasoline, entertainment, food, etc. Tracking you spending helps you to find unnecessary expenses.
3. Make goals. Goals include creation of a financial airbag sized 3-6 wages, car repairs, holidays, and pension. Your goals are to motivate you to spend less and stick to your budget.
4. Draft a plan. The simplest rule is 50/30/20, where 50% of your income are necessary expenses, 30% are unnecessary ones, and 20% are savings.
5. Correct your expenses. Avoid overspending to get closer to your goals. For example, food, dwelling, and gas are so essential that spending on them is most likely unable to be cut down on. However, streaming services, cafes, and shopping are entertainment that can be compromised for reaching your financial goals faster. Mind that even small savings provide for large saved sums in the future.
6. Revise your budget. After you have set your goals and have accounted for all sources of income and expenses, check you budget again to make sure you are sticking to the plan. You income and spending may change, but the main thing is to correct your budget in time.
Why it is profitable to plan budget
Budgeting allows for balancing out your income and expenses and reaching your financial goals. The latter ones may be as ambitious as buying real estate, or more modest, like buying a smarphone. A budget will provide more accurate information about how to reach your goals fast.
Another reason for thinking about a family budget is creating a reserve for some emergency. It is recommended to save no less than 10% of your monthly income for a money airbag. It should last you 3-6 months in case you lose your source of income. This is one of the main rules taught on financial literacy courses.
Tracking all your expenses helps to find some possible sources of saving. And even is it seems that you have saved little today, imagine how this sum may grow with time if you stick to the plan.
Bottom line
A budget allows for tracking your income and expenses easily and in detail. A budget is the base for financial success and safety. It also helps to make difficult financial decisions.
