Budgeting and financial planning are two terms that are easily confused. Both apply to personal finance and both are activities that can help you succeed financially now and in the future. Yet, even though the two go together, they are not the same. Here’s how they differ and how they can work together to help you achieve your goals.
Budgeting sets safeguards for your spending. The goal of budgeting is to help people live within their means. A budget predetermines how much you can spend for a certain period of time based on your actual income. People who stick to a budget are better equipped to avoid overspending.
To create your budget, you allocate your income over your expenses for a given period. This timeframe is usually tied to your payroll schedule, whether weekly, bi-weekly, or monthly. Fixed expenses, such as rent and childcare, take priority. After accounting for fixed expenses, expense parameters are established for necessities that vary in cost, such as food, transportation, and clothing. The remaining dollars can be allocated to discretionary expenses, such as dining out 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 need to track your spending and be prepared to make adjustments. A budget that offers some flexibility is usually easier to follow.
Budgeting can help you spend within your means. However, you can budget forever and not achieve 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. It charts your journey to reach milestones, such as home ownership, starting a family, higher education, and retirement.
Like budgeting, financial planning is a dynamic process that benefits from both regular review and adjustment. A financial setback, windfall, or other change in your life situation will affect your financial plan.
A certified financial planner or a financial advisor who offers financial planning services can help you create a tailored financial plan. This professional can be a resource for objective advice on future 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. Following a budget can help you manage your money and avoid debt, but having a financial plan can help you achieve your long-term financial goals. Speak to a finance professional today to learn how you can benefit from these two important financial disciplines.
Holley Smaldone-Cragg, CFPC, is a Financial Advisor at Ameriprise Financial in Geneva. She specializes in fee-based financial planning and asset management strategies and has been practicing for over 35 years. His website is ameripriseadvisors.com/holley.com.