What Role Does Budget Play in the Planning Process?
Budget plays an important role in the planning process. The budget is a tool that helps you to achieve your goals in life. Budgets change throughout the years as needs change. Single people may save regularly for vacations, parents may contribute toward college funds, and empty nesters may concentrate on their upcoming retirement. A good budget lets you know if you are on track to meet your life goals.
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Features
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The budget tracks income and expenses, identifies areas with too much spending, identifies tax deductions, monitors savings and other investments, and helps to manage or eliminate debt. One of the most important features of the budget is being able to identify areas where you can cut spending. You can reallocate that money toward achieving one of your goals.
Function
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As you make a list of your life goals, calculate how much each one will cost and how you will pay for it. This is where the budget comes into play. By tracking your income and expenses, you quickly know how much disposable income is available. For example, if your goal were to remodel the kitchen, then you would start with researching prices on cabinets, lighting, flooring and appliances. Look at your budget to see how much you can allocate every payday toward the kitchen-remodeling category. You are less likely to spend money on fast food or entertainment with a written plan and a budget. The budget helps you to stay focused on your goals.
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Significance
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A budget helps to achieve financial security so you can enjoy the good things in life. Avoid the debt trap by incorporating a budget during the planning process. If you are already behind on the bills, then use a budget to reduce your debt load. Additionally, note if an investment is not achieving a good rate of return, and use this knowledge to make changes to your plan so you stay on course toward financial wealth. The budget and your life plan coordinate with each other when they are both flexible.
Types
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There are two types of expenses: fixed and variable. Fixed expenses cost the same amount every month, such as the housing payment and car loan. Categories such as food, entertainment, clothing and utilities are variable expenses. You have control over variable expenses and your greatest savings comes from this part of your budget. For example, if you need to shave $100 a month from your spending, then avoid take-out foods, rent a DVD instead of going to the movies, shop for clothing at thrift stores and cancel the premium channels on cable. Looking at the different categories of your budget helps you to identify potential savings.
Prevention/Solution
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You can prevent having a failed budget or life plan by designing the budget as you itemize your goals. This coordination and flexibility between the two gives you greater ability to achieve success than someone who simply lets life happen.
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