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Understanding what a budget is is useful whether you are an individual trying to manage your personal finances or someone who is self employed attempting to organise their business finances. A budget is a powerful tool which, although commonly overlooked, can change your financial life
What is a Budget?
A budget is a forward thinking income and spending plan for a set period of time. In simple terms is an estimate of all your planned income and all your planned costs. Once put together you can review your spending and earning against it to identifying anomalies or helping you to achieve long term or short term goals.
The Importance of a Budget
Whether you are creating a budget for your personal life or your business, a budget will help you to:
- Plan and control your day to day spending;
- Adjust your spending in one area to allow more spending in another;
- Avoid you shooting from the hip when it comes to unplanned costs;
- Work out if you can pay yourself and budget your tax bill;
- Remove the guess work from day to day decision making;
- Give you peace of mind when you are spending;
- Know your break even number;
- If you are starting out in business, help you to calculate your start up capital;
- Help you create a plan to get yourself out of debt, or if you are planning to take additional debt on, whether you can afford the repayments.
By creating a realistic budget you can focus on making the right day to day decisions in your business, using your budget as your checkpoint for your all decision making.
Using Your Budget to Monitor Your Performance
Creating your budget is just the first step to taking financial control. The next really important step is to monitor your actual performance against your budget as well as using it every time you need to make a spending decision. Monitoring your reality against your budget will give you insight into:
- the accuracy of your budget and whether it needs tweaking;
- alert you to any unexpected spending;
- highlight where your earnings are behind the estimations you made in your initial budget.
Types of Budget
The term budget is quite broad, so depending on the person or organisation preparing a budget they may refer to it with a more specific name, so it is clear what the budget relates to. Here are some common types of budgets:
- Financial Budget
- Personal Budget
- Operating Budget
- Annual Budget
- Monthly Budget
- Business Budget
- Budget for irregular income
The type of budget you need will depending on what you are aiming to achieve, but fundamentally every type of budget captures estimated income and expenses for a particular time period – its just the type of income and expenses may differ in nature.