The importance of a Budget to your personal finances

budget_pieIn the business world, management lives and dies by their budgets. A budget’s importance cannot be overstated,without one you cannot know how well you’ve performed over the time period your analyzing nor take any corrective actions if you don’t know whats gone wrong.

Most businesses are started and built upon debt, thus the most meaningful way to ensure the debt will be repaid is through maintaining budgets and setting goals. You must look at your personal finances like a business does, and lay out all your anticipated expenses within a given time frame. Everything starts with a budget for a business, and ends in analyzing and evaluating spend against budget, and taking corrective action after goals are not met.

Businesses create short term budgets and long term budgets. The companies that I have worked for start by looking at sales (projected sales in most cases – similar to your anticipated revenue stream, otherwise known as your take home pay), then financial management builds up monthly, quarterly, annual, and 3 to 5 year budgets. With this, management can determine such things as; What will our bottom line look like if we stick to this budget. Are sales revenues truly going to cover costs and debt, or not? How come we weren’t able to stick to our budget – or why did we finish more favorable than we thought we would (did we make our budget too loose, meaning did we not make budgets tight enough).

Basically, management uses the budget as first a reasonable or sanity check. By this I mean, are there monthly goals going to make them any profit or at least break even. If not, back to the drawing boards. Where can they cut costs or increases revenues? After management agrees to their best budget, they proceed with operations, buying and selling as they set they had planned. At the end of the month, management goes back and reviews all of their cost and revenue, and they analyze their actual costs and sales against budget. From here, they can start to interpret what happened, good or bad. Why we’re labor costs so high, why we’re utilities costs lower than budgeted, and so on. The message here is, they now have the ability to know if they’ve met their goals or not, and they can start to figure out why they have or haven’t met their goals. After doing this for a continued period of time, say over a couple of years, management can start analyzing how they did year over year and so on.

Without management budgets, like personal budgets, you could never know if you have done well or not, or if you could have changed the outcome if you had known something was going wrong mid month for example. Personal budgets are critical to your personal finances, without them you’re essentially not managing your finances.

Our roadmap to understanding personal finance will next take you on the journey of setting up a personal budget, so that you can start taking control of your finances and reduce your debt. After you’ve mastered that, you can then more easily move on to setting up a retirement plan and following through on it.

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