Budget planning entails identifying the sources of income and taking into account all current and future expenses, with an aim to meet an individual’s financial goals. The primary aim of a budget planner is to ensure savings after the allocation for spending.
Budget is an important concept of microeconomics and can be understood as an organizational plan stated in monetary terms. Business start-up budget, corporate budget, event management budget, government budget and personal or family budget are some variations of this concept.
Budget Planning: Making Ends Meet
In a personal or family budget, the sources of all income (inflows) are identified and the expenses or outflows are planned for. The final plan seeks to match the outflows to inflows. The equation that restricts an individual or a household from spending more than the available resources is known as budget constraint.
How is Budget Planning Done?
By following good budgeting strategies, one can ensure the successful management of his or her expenditure and the recording of savings so that investments may be made for securing one’s future. Increased life expectancy has raised the amount of money one requires after retirement. This means that there is a need for increased retirement savings, while most people are living paycheck to paycheck or depending on credit card debt (which has a high interest rate) to raise their standard of living. Thus, there is a growing need for effective personal budget planning.
Step 1: Calculate your income: This should include income from all sources, including your paycheck and interest from any investment.
Step 2: Determine your bill for essentials: List out your essential expenses, which may include rent, grocery, clothing, telephone and electricity bills and gas and car maintenance. Calculate the amount spent on each.
Step 3: Determine your debt elimination: Note down your total debts, including interest payments on the same.
Step 4: Determine your bill for non-essentials: Your list of non essentials may include vacations, gifts and trips to restaurants. Calculate the amount spent on each.
Step 5: Calculate your savings: This is done by subtracting the figure obtained by adding steps 2, 3 and 4 from the figure obtained in step 1.
Benefits of Budget Planning
It puts checks or balances in place in order to prevent overspending at various levels.
- Takes into account the unexpected need for funds.
- Helps one maintain his/her standard of living post retirement.
Risks of Budget Planning
Excessive emphasis on savings may affect the quality of life.
- If the budget is planned too tight, adherence to it may become an issue.