Budgeting and financial planning are two terms that are easily confused. Both apply to personal finance, and both are activities that can help you be financially successful now and in the future. However, although the two go hand in hand, they are not the same. Here are the ways they differ and how they can work together to help you achieve your goals.
The budget sets guardrails for your spending. The purpose of the budget 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, you divide your income by your expenses over a set period of time. This time period is usually tied to your pay schedule, whether it’s weekly, bi-weekly, or monthly. Fixed expenses, such as rent and childcare, take precedence. After accounting for fixed expenses, spending parameters are established for necessities that vary in cost, such as food, transportation, and clothing. The remaining dollars can be allocated for discretionary expenses such as dining and entertainment. A budget can also include a fund for rainy days or vacations.
Remember that budgeting is an active process. To be successful, you must track your spending and be prepared to make adjustments. A budget that offers some flexibility is generally easier to follow.
Budgeting can help you spend within your means. However, you can budget forever and still not reach the kind of long-term goals that financial planning is designed to help you achieve.
Financial planning provides a roadmap for your financial future. Unlike budgeting, financial planning is not limited to the present. Your financial plan considers 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 action steps to help you achieve your life goals. Chart your course to milestones like homeownership, starting a family, higher education, and retirement.
Like budgeting, financial planning is a dynamic process that benefits from regular review and adjustment. A financial setback, windfall, or other change in your life circumstances will affect your financial plan.
A certified financial planner or a financial advisor who offers financial planning services can help you create a personalized financial plan. This professional can be a resource for objective advice on future financial decisions. Your comprehensive financial plan likely uses insurance and investment products to help protect your assets and increase your savings.
Budgeting and financial planning work well together. Following 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 financial professional today to learn how you can benefit from these two important financial disciplines.
Holley Smaldone-Cragg, CMFC, is a Financial Advisor for Ameriprise Financial in Geneva. She specializes in fee-based financial planning and asset management strategies and has been in practice for over 35 years. Her website is ameripriseadvisors.com/holley.com.