A budget is basically a financial blueprint for a specified period, usually one year. It can also comprise planned revenues and volumes, planned expenditures and budgets, fixed assets, liabilities, revenues and net profits. A budget is used to control the overall expenditure, as well as help in making financial decisions. The process of creating and maintaining a budget is called budgeting. The objective of budgeting is to control the total expenditure and improve financial management. The term “budget” comes from Latin boccia “to cut,” and budgeting is an exercise of control through balancing the budget.
The practice of budgeting has roots in many ancient civilizations. The Greeks and the Romans were famous for their use of budgets as a means of fiscal management. The Egyptians, among others, also developed detailed and meticulous accounts of their financial situation. While these early civilizations had relatively sophisticated systems, budgets developed in modern civilizations over a century or so. They differ in basic types, with some involving fixed schedules of allowances for expenses while others are less rigid and are flexible enough to allow room for temporary changes.
A standard budget will list the major financial commitments, as well as those which are more of an allowance rather than a requirement. All receipts are usually listed at the end of the month, with all disbursements made according to the schedule on that month’s budget. Budgets can vary significantly depending on individual circumstances. However, these general principles still form the basis of most budgets.
In order to determine whether your budget provides you with the information needed to set and reach long-term financial goals, you must look back over your budget’s history. Budgets will show you where you have been and where you are going. With this knowledge, you can begin to formulate strategies to move you in the right direction. For instance, if your budget has had a large amount of revenue loss, it may be time to look for investments that generate money instead of simply income.
Regardless of your current financial situation, the budgeting process should include some type of savings plan. People with steady employment and incomes that cover their basic needs typically save throughout the year. More serious savings efforts may focus on building a nest egg through various investment programs. In order to reach long-term goals, one must realize that the savings process does not stop with the moment of earning a paycheck.
Variable expenses should also be part of any budget. These expenses are those that change based on an external factor such as a job change, increase in taxes or other long-term changes to an individual’s income. If you are able to plan ahead for changes in income, you should do so in your budget. While this may seem like additional work, by being prepared ahead of time, you will avoid having to spend more money at tax time when variable expenses come into play.