Budgeting vs. Financial Planning: What’s the Difference?
If you want to do something different this year to improve your finances, you may be looking to start a budget or do some financial planning. That’s great! But you should know that these two ideas are not the same. While they may seem pretty much the same, they’re different concepts that can be used to improve your financial standing and get you further to achieving your financial goals. So, what are the differences between budgeting and financial planning, you may ask? This article will help break it all down for you.
Elements of a Budget
What Is Budgeting?
Budgeting is the act of tracking how much you earn and how much you spend. Budgeting helps you to determine how much money you have to work with every month and what you can afford. Budgeting also lets you be more conscious of spending because it helps you know how you’re spending your money and can help assess if you’re overspending in certain areas.
How Do You Budget?
It’s not easy for everyone to start budgeting. Some consider it a tedious task that’s time-consuming and not fun. This may be true; however, it is still one of the surest ways to help you reach your financial goals. To get the most of the time you spend budgeting, you’ll want to make sure you do these things:
1. Choose a method for tracking your money. Whether it be by spreadsheet, pen and paper, or a budgeting app, there needs to be a method for tracking your income and expenses. Without it, it’s a futile process.
2. Decide the frequency of your tracking. Most people have monthly budgets. However, you could do weekly, bi-weekly, or even quarterly budgets. For the purpose of this article, we’ll focus on monthly budgeting.
3. Gather all of your financial documentation. Financial documentation is anything that relates to what you’re bringing in and what you’re spending. That means bank statements, pay stubs, bills, receipts, etc. It will be important not to leave anything out. If you do, the budgeting process won’t prove beneficial for you.
4. Make a list of your income. Choose all income that comes in during that month. That includes full-time, part-time, annuities, retirement, unemployment, alimony, child support, etc. If it’s money added to your household, it needs to be included as income. This is how you know how much money you actually have to spend.
5. Make a list of your expenses. Start with your fixed expenses since you know you’ll have to pay these monthly expenses, regardless of whether you can afford them. Categorize your expenses as either fixed or variable expenses. Variable expenses change monthly or may not always cost the same.
6. Add up all your income and all of your expenses. Seeing what you actually brought in for the month versus what you spent will determine if you’re overspending. Subtract your expenses from your income to determine if your money is actually taking you through the month.
7. Adjust your expenses accordingly. Focus on your variable costs to adjust your spending so that your income takes you further during the month. If you need to cut back on what you spend on groceries, or other variable expenses, this is the time to note that. But don’t just make a note of it, do it.
Also, even if you’re not overspending, you may still need to find additional money to further some of your financial goals. This is also where adjusting your variable expenses could allow you to put more money toward saving for those goals.
Elements of a Financial Plan
What Is Financial Planning?
Financial planning is a comprehensive strategy you use to get to short or long-term financial goals — from planning a wedding to buying a home. Developing a financial plan is an act that allows you to plot a course that helps you to stay on track to reach those financial goals.
How Do You Create a Financial Plan?
1. Determine your financial goals. Financial goals are things or projects that are not common, everyday occurrences and could take place five to 10 years out or even a wedding that will take place within a few years. Some things that involve financial planning include:
- Planning a wedding
- Buying a home
- Planning to have kids
- Paying off debt
- Saving for college
- Starting a business
- Planning for retirement
2. Know your overall financial situation. This is where budgeting proves beneficial because it helps you know your current financial situation. It also considers other net worth that may not be seen on your budget, like investment dividends, emergency savings, retirement savings, cash value from a life insurance policy, or other safely put-away income. This gives you a total net worth and helps you to know what could be helpful toward your financial goals.
3. Adjust your budget to help compensate where needed to get to your financial goals.
4. Evaluate your progress and make adjustments as needed as you go.
You could even decide to work with a financial advisor to help with your financial planning to ensure you reach your goals.
Budgeting and Financial Planning
How Are They Different?
Budgeting and financial planning are practical processes to accomplish your financial goals. The main difference between the two is that budgeting gives you a current perspective of your finances and provides an immediate course of action to manage your money better. Financial planning allows you to put a comprehensive, long-term strategy in place that will benefit you further down the road — to help you get to where you’re trying to go.
How Do They Relate?
Creating a budget is the first step in working toward your financial goals. Getting to something is hard when you don’t know where you are. The budget provides a starting point; the financial plan is the long-term strategy used to get from your current location to your ultimate destination.
The Bottom Line
If you have financial goals, you need a budget to help manage your current cash flow and spending to get you on the road to where you want to be. You also need a financial plan for anything five years or out to ensure you reach those goals. Start with your budget, and once you have that in place, determine your long-term goals. Either on your own or with the help of a financial advisor, begin to put a financial plan in place that will determine how you will get there.
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