Budgeting 101 – Understanding What Budgeting Is And Why It Matters
With a tight economy it can seem difficult to come up with a budget and stick to it. There are a few different ways to approach budgeting and making it work. One way is by having a specific goal in mind before beginning the budget process. Another way is to have a realistic budget and work within the means. The best way to begin any budget process is to make a list of your needs and wants for the upcoming year and then create a budget based on those needs and wants.
DescriptionA budget is essentially a financial strategy for a given period, usually one year to two years. It can also include planned expenditures and revenues, financial obligations, resources, costs and expenses, liabilities, and capital assets. For businesses, budgets can serve as a tool to align spending with objectives, as well as serve as a road map to ensure that the business’s resources are used efficiently. Some people call a budget a living plan; a tool for ensuring the future, planning for success, or even for avoiding bankruptcy.
In order to help create realistic and sustainable budgets, there are many resources available for businesses and individuals. There are budgeting books, websites, classes, seminars, financial calculators, software and online applications. Many people find that learning how to use one of these tools or creating their own personal budgets allows them to more effectively manage money. These tools can also give you a starting point for creating long-term budgets that are effective for your lifestyle and business.
To begin a successful budgeting process, there are some basic tools to consider that can help to ensure the effectiveness and long-term viability of your finances. These include: setting financial priorities, identifying risks, identifying opportunities, establishing realistic goals and expectations, setting realistic financial management principles, creating and maintaining a financial monitoring system, determining which expenses are necessary and which are optional, identifying opportunities for reducing expenses and increasing revenues, analyzing cash flow in the operating budget and determining if any adjustments are needed. There are many other areas of finance that require similar budgetary tools, but for the sake of this article we will focus on some of the basics.
Identifying risks is one of the most important parts of a budgeting process. When setting a budget, it is important to identify both the potential costs and the potential benefits of the financial plan. Most budgets will include both an income and expense element. Identifying and eliminating risks in a household budget will allow you to properly assess and allocate your household resources to meet the needs of your family. This is an important part of budgeting because financial security is one of the primary drivers of happiness.
An interesting trend is that most households do not closely track their expenses. The majority of household budgets are set only loosely and adjusted based on estimates of future income and expenses. If you want to create a truly personalized budget, you will need to carefully monitor all of your household expenses. With this knowledge, you will be better able to establish your realistic expectations about future income and expenditure levels.