Budgeting and financial planning are two terms that are easily confused. Both apply to personal finance and both are activities that can help you achieve financial success now and in the future. Yet if the two go hand in hand, they are not the same. Here’s how they differ, and how they can work together to help you achieve your goals.
Budgeting establishes safeguards for your spending. The purpose of budgeting is to help people live within their means. A budget predetermines how much you can spend over a certain period of time based on your actual income. People who follow a budget are better equipped to avoid overspending.
To create your budget, divide your income between your expenses for a given period. This timeframe is usually tied to your pay schedule, whether it’s weekly, bi-weekly, or monthly. Fixed expenses, such as rent and child care, take priority. After posting fixed expenses, expense parameters are set for necessities that vary in cost, such as food, transportation, and clothing. The remaining dollars can be used for discretionary expenses, such as dining and entertainment. A budget can also include a rainy day or a vacation fund.
Remember that budgeting is an active process. To be successful, you need to track your spending and be prepared to make adjustments. A budget that offers flexibility is usually easier to follow.
Budgeting can help you spend within your means. However, you can budget forever without hitting the kind of long-term goals that financial planning is designed to help you achieve.
Financial planning provides a vision for your financial future. Unlike budgeting, financial planning isn’t just about the present. Your financial plan takes into account where you are now, as well as where you want to be in the future. It requires vision.
The purpose of a financial plan is to formulate steps to help you reach your life goals. It charts your path to achieving milestones, such as homeownership, starting a family, higher education, and retirement.
Like budgeting, financial planning is a dynamic process that benefits from both regular review and adjustments. A financial setback, windfall, or other changes in your life situation will affect your financial plan.
A financial planner and / or certified advisor who offers financial planning services can help you create a tailor-made financial plan. This professional can be a resource for objective advice on upcoming financial decisions. Your comprehensive financial plan will likely use insurance and investment products to help protect your assets and grow your savings.
Budgeting and financial planning work well together. Keeping a budget can help you manage your money and avoid debt, but a financial plan can help you reach your long-term financial goals. Talk to a finance professional today to find out how you can benefit from these two important financial disciplines.
Teresa L. Turner is a financial advisor at Independent Investments Group, a financial consulting firm of Ameriprise Financial Services, LLC. In Florence, Alabama. She specializes in fee-based financial planning and asset management strategies and has practiced for 24 years. To contact Teresa, call 256.765.3622 or email [email protected]