The idea of creating and living on a budget can be overwhelming, but by understanding budget planning, you can meet financial goals easily. Understanding budget planning involves figuring out what the ideal budget would accomplish, tracking income and expenses and then tailoring a budget based on those three criteria to achieve the budget's goals.
Identify Goals
- The first and most important step in understanding budget planning is why you are creating a budget in the first place. Without budgeting goals, the budget would be much like a map without a destination. For personal budgeting, the goal may be to reach a certain dollar amount by retirement; for businesses, the budget goal may be to hit a certain cash reserve by the next business quarter. Before even setting up a budget, decide what you'd like to accomplish.
Review Current Income Sources
- In order for a budget to be effective, it must take into account current income sources. Such sources may include jobs, investment income and side business income. By tracking income sources, you will be able to clearly see money inflows, which you can use to either pay expenses or put toward the goal of the budget.
Review Current Expenses
- Expenses offset income and defer funds that you could use toward the budget's goal. In order to build an effective budget, you should record all of your expenses to clearly illustrate where you spend money each month. By reviewing all expenses, it's possible to see where each penny goes and to gain ideas of where to reduce expenses for the budget.
Build the Budget
- After you set your budget goals and track income and expenses, the next step is building a budget that accomplishes your financial goal. Based on current levels of income and expenses, you can determine if the budget will meet its goal. In order to reach the budget goal, you may have to increase the level of income, decrease expenses or establish a combination of the two.
