According to Investopedia, a budget is “An estimation of the revenue and expenses over a specified future period of time.” They can be used by individuals or an entity that is involved in financial transactions. Right from a student to the Government finance departments, anyone can effectively create a plan for their incomings and outgoings.
Understanding personal budgets
A personal budget charts out what you earn and how you spend it in statutory payments, daily living, long-term expenses, investments, debt repayments and so on. The shortfall shown in a financial budget often indicates the requirement for external borrowings. Your time horizon for planning may vary between a week and a block of years. It all drills down to the goals that you have in your mind for in the short, medium and long terms.
The significance of a personal financial budget
- Overview. A well-designed personal budget provides an overview of the user’s financial situation, updated periodically.
- Understanding. A written form of data provides a much better understanding than mental calculations. A proper budget connects the various dots to present a complete picture of whether you are able to manage your finances well and whether your income is sufficient to meet your outgoings.
- Time Economy. If you do not have a ready budget, you may have to start all over again every time to sit down to analyze your finances. If you do your rough calculations here and there, you may not get all the data that makes sense when you need it. A budget saves considerable time by avoiding redundancies.
- Priority Setting. A personal financial planner can help you eliminate expenses on areas that are not so important to focus on things that are higher on your priority.
- Loss Minimization. A budget also helps in eliminating wasteful expenditure, such that you can spend on the items you like or enhance your liquidity. In addition, if you give up on the consumption of some units of same non-essential items, you may not feel much difference, but you may certainly save something.
- Planning. You may develop a roadmap to your planned savings by identifying the potential areas, for some big ticket items, such as a house.
- Performance. You can also track the performance against your budget by category or type, if your planner so provides. It is quite a handy tool in pointing at the areas of possible inefficiencies. Your variances in one period can also be compared with other periods.