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Financial planning and budgeting are both important for creating a stable financial situation. Budgeting manages day-to-day expenses while financial planning sets goals and objectives. Adequate cash flow is necessary for both to work, and adjustments may be necessary to accommodate income levels.
While both financial planning and budgeting are important tools in creating a stable financial situation for an individual, household, or business, each function provides specific benefits. Essentially, the budget makes it possible to manage day-to-day costs and expenses in a way that keeps the operation running. Financial planning allows you to have a destination or objective for that movement, which in turn improves the work of the budget.
One way to understand the difference between financial planning and budgeting is to view planning as identifying a goal, while budgeting is the tool used to make that goal possible. For example, if the goal is to set aside funds for a child’s college education, financial planning will go through the process of determining how much money should be set aside to finance four years at the institution of choice. Once the objective is clear, it is possible to look at the available income stream and determine how much money needs to be set aside each pay period to save the desired amount of money. That amount is included as a line item in the household budget, and if you faithfully set aside each pay period, you’ll have the funds on hand when your child embarks on his college career.
This same general approach to financial planning and budgeting can be used for short- and long-term financial projects. A goal like buying a new appliance will involve researching the purchase and identifying the exact model that is desired and the total purchase price for that particular model. From there, the household budget is assessed and funds are diverted to make the purchase, either by earmarking funds to pay off credit card debt incurred to purchase the appliance or by setting aside money for a specified number of payment periods to buy the appliance immediately. With both approaches, setting goals, planning a way to reach those goals, and then budgeting for the goals to be met is a logical sequence that can work in almost any situation.
It is important to note that for this financial planning and budgeting sequence to work, there must be an adequate amount of income available to create a workable budget. Cash flow management is important for setting any type of financial goals, whether those goals are associated with retirement planning, estate planning, or tax planning. Without adequate cash flow, it is impossible to create a viable budget and eventually achieve your desired goals. For this reason, it is sometimes necessary to adjust financial planning to accommodate current income levels and set reasonable expectations and time frames for achieving desired goals. Keep in mind that as revenue increases, it is always possible to reassess financial planning and budgeting, and adjust line item allocations to speed achievement of stated goals.
Smart Asset.
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