Deciding to become financially responsible is one of the keys to becoming a true adult. The only problem is that all the terms can be overwhelming. Budgeting, financial planning, cash envelopes… What does it all mean?
Take a deep breath. You can master your finances and meet your financial goals. It doesn’t matter where you’re at in life, budgeting and financial planning will help you make the most of your income.
Let’s take a closer look at the difference between budgeting and financial planning.
What is financial planning?
Financial planning is taking a look at the bigger picture. When do you want to retire? How much money will you need per month when you do retire? Will your house be paid off? How will you meet these goals?
First Step: Financial Planning
The first part of financial planning is to discover where you currently stand financially. What is your income? What expenses do you have? Do you receive bonuses throughout the year?
Do you have money in a retirement account? You need to know where you’re at before you can decide where you’re going.
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Second Step: Financial Goals
The second step to financial planning is creating financial goals. Examples of financial goals may be retiring at 55, having your house paid off in 10 years, or being out of debt within the next 2 years.
This is what you’ll be working toward. When you have goals in place, you can plan out how to reach those goals.
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Third Step: Create a Plan
The last step is to create a plan to reach those goals. For example, you might use an online calculator to see how much money you need to pay toward debt to be out of debt in 2 years.
Or you might use a calculator to determine how much extra you need to pay on your house payment to pay off your house in 10 years.
Financial planning will help you be more successful in managing your money.
Why is it financial planning so important?
The reason financial planning is so important is that it creates goals. In other words, you have a set plan so that you’re spending money wisely. Instead of just spending randomly, your money now has jobs.
Some money may be set aside for paying extra on your mortgage, while other money is set aside for your retirement. Financial planning gets you where you need to go so that you’re financially successful.
What is budgeting?
Budgeting is much different than financial planning. Instead of focusing on the long-term, you’re more focused on the here and now. A budget is like “A plan for what you’ll do with your money.” A blueprint of some sort.
It’s a plan for what’s coming in and what’s going out. When you budget every month, you’re giving your money purpose. You’re taking control.”
What does this mean? It means you’re going to sit down and look at your monthly income and your expenses. If you have more money going out than coming in, you have a problem that needs to be addressed immediately.
It may require cutting expenses or getting a second job. When this happens, it means that you’re living above your means.
Financial experts have varying opinions on how you should break down your budget. One such plan is the 50/20/30 or 50/30/20 plan.
We encourage you to find the budgeting style that works for you and your family. I personally don’t follow many of these plans, but they did help me when I was figuring out this budgeting process.
In this plan, you spend 50% of your after-tax income on needs. This would include mortgage payment, groceries, minimum debt payments, utilities, etc. You would then spend 20-30% on savings/debt repayment.
Debt repayment is covered in the needs category. However, the quicker you get out of debt the better. If you’re in debt, put at least part of this spending toward debt repayment. If you don’t have an emergency fund, money needs to be put toward that as well.
The last 20-30% (depending on how you do your plan) is to be put toward wants. This is play money. Do whatever you want with it.
Budgeting ensures that your expenses are covered and that you’re living within your means. Budgeting should be looked at regularly to make sure you’re making the most of your income.
Never compare your budget with someone else’s. Your budget should work for you and your family. Just because someone is focusing on just paying off debt, doesn’t mean you have to focus on that. You can save and pay debt at the same time.
You can also have fun and enjoy vacations by budgeting too!
What is budgeting so important?
Without budgeting your income, you risk never having money in a retirement account, never being out of debt, and being stressed out. Budgeting allows you to make the most of your money.
Why are financial planning and budgeting important?
Financial planning and budgeting work hand-in-hand. Think of your budget as a way to meet the goals you’ve set in your financial plan. You set large goals in your financial plan.
Each month, you reach smaller goals by ensuring that your money goes toward the larger goals. As long as you’re budgeting your money correctly, your financial plan will stay on track.
Learning financial terms can be intimidating, but learning leads to succeeding. If you want to take charge and be financially successful, you need a budget and financial plan. The sooner you get started, the sooner your money can be used to reach your goals.