The terms “budget” and “financial plan” are sometimes used interchangeably. However, in my mind, there are differences between the two. I have a budget for each month, along with an over-arching financial plan. To me, a budget is more of a short-term spending plan and a financial plan is long-term with multiple goals and steps along the way.
Here are some of the differences between a budget and a financial plan.
First, let’s talk about what makes up a budget. A budget is a listing of your expenses and financial obligations and is a guideline for your spending. It may contain categories, like housing, utilities, groceries, etc. In addition it is usually for a specific time period, such as a monthly budget or a weekly budget. Generally your expenses are broken down into a budget and then totaled so they can be compared to your income for the same period of time. In this way, income and expenses can be compared so adjustments can be made to help you achieve balance in your personal finances.
Now let’s examine what a financial plan is. A financial plan helps you to evaluate your financial state using your budget as well as many other tools. There can be many different components to a financial plan.
To examine your cash flow you need to know and understand your budget as well as your position as far as assets and outstanding debts. Future income from employment as well as from businesses you may own can play a part in your cash flow and your overall financial plan. Future withdrawals need to be anticipated in order to effectively plan for your financial future, and so you don’t overdraft your checking account.
You will need to manage your investments wisely in order to maintain a positive financial plan. Reviewing your portfolio regularly is a must, and making appropriate and informed changes bases on the evaluation of your investments and retirement accounts is also needed if you intend to see them grow over time.
Planning and preparing for your taxes is important to your overall financial plan. You need to be able to manage your taxes effectively to maximize and preserve your investments. This can include tax reduction strategies and using tax deductions wisely in order to reduce the tax liability you owe each year.
Some people have enough assets to include estate planning as a part of their overall financial planning. Just keep in mind that “enough assets” is relative and it can be different for each person. If that is true for you, you need to plan for and protect any beneficiaries you may have and ensure that your wishes are carried out. Regular updates to your estate plan are important to ensure maximum retention of assets.
If you own assets, as most people do, you need to include those in your financial plan. Management of them may include adding to your assets as well as disposing of them by sale or other means in the future.
Insurance is not always something people remember to include in their financial planning. With healthcare costs going through the roof, planning for possible expenditures is important to your overall financial well-being.
Conducting a thorough review of your overall financial plan is needed on a regular basis. Life and situations are constantly changing causing the need for changes to our financial plan in order to keep up.
As you can see, a budget is not the same as a financial plan, but is, in fact, a part of a successful financial plan. I hope this clears up any confusion between the two and enables you to plan for a healthy financial future.
Do you have a budget? What about a financial plan?