In today’s hard economic times, financial planning principles dictate that one should have a budget. Simply put, a budget is a future plan that allocates your current and future income towards meeting your debts obligation, living expenses and savings. A personal budget is based on your past spending patterns, personal debts and earning potential.
But what are the features of a good financial budget? What tools are available to help one draft one easily? Well, to uncover the answer to these questions, read this short article. However, before I get you started, I must tell you that having a good financial budget will not help you achieve financial efficiency on its own; it calls for commitment and to your goals both in the long term and in the short term. Here are the key financial planning principles of a good financial plan;
Purpose Of Personal Budget
At the heart of any good budget lies a definite goal that is to be achieved within specified time frame. Your goal in financial planning must be specific and measurable.
The more complex your budget is, the less the probability that you will religiously keep up with it. The key importance of a personal financial budget is to identify the areas where your income goes and to ensure you are making optimal allocations. A great idea is to classify similar items together so that the budget is short and your goals memorable.
Your personal budget should be flexible. This is because no matter how much you try to plan, you cannot predict all future occurrences accurately. This will normally result to cost overruns in some category of expenses and under estimation in others. Such variances should always be accounted for during the following month. Further, your budget should be flexible enough to accommodate new expenses and sources of incomes.
Budgeting for Irregular Income
A key challenge arises in financial planning for individuals with irregular incomes. This is because due to the fluctuations in their incomes, it is much likely to overspend at some time. A great way out is to look at the average income over a period of 3 years and using it to predict income in the current period. Idea, or other extraordinary events expected during the financial period should be factored in while making the estimate of current year income and expenses.
Tools to use in drafting a budget
First, note that regardless of the budgeting tool you will use, the accuracy of the budget will only be as good as the accuracy of the data used. In modern times, computer generated financial budgets are widely being used. Here is a look at the 5 most common budgeting tools.
- Pencil and paper
- Spreadsheet software
- Money-management software
- Money-management websites
- Spending-management software
In conclusion, good financial planning calls for drafting of a budget. Ideally, use the most recent data and look at the trends in your incomes and expenses over a period of 3 years. Further, endeavor as much as possible to make your budget simple, accurate, flexible and comprehensive as possible. A great idea is to pin your budget somewhere you will always have visual contact with it. This way, you will always have your financial goals in mind.