Budgeting for Skilled Money Management

BUDGET – it is also called a spending plan. It is a specific plan for spending income.

MAIN PURPOSES OF A BUDGET ARE TO HELP YOU:

 Live within your income.
 Spend your money wisely.
 Reach your financial goals.
 Prepare for financial emergencies.
 Develop wise financial management habits.

THE BUDGETING PROCESS

 Assess your Current Situation
 In this preliminary phase, your main tasks are to:
o Measure your current financial position
o Determine your personal needs, values, and life situation

 Plan your Financial Direction

 The actual budgeting activities occur in this phase with:
o Step 1: Set Financial Goals
o Step 2: Estimate Income
o Step 3: Budget and Emergency Fund and Savings
o Step 4: Budget Fixed Expenses
o Step 5: Budget Variable Expenses

 Implement your Budget

 As you select and use your budgeting system, this phase involves:
o Step 6: Record Spending Amounts

 Evaluate Your Budget Program

 The final phase of the process calls for you to:
o Step 7: Review Spending and Saving Patterns

 With the completion of the process, possible revisions of financial goals and
budget allocations should be considered.

BUDGETING ACTIVITIES

STEP 1: SET FINANCIAL GOALS

Financial goals – are plans for future activities that require you to plan your
spending, saving, and investing.
It should take a S-M-A-R-T approach with goals that are: Specific, Measurable, Action-oriented,
Realistic, and Time-based.
Your personal financial statements and budgeting allow you to achieve your financial goals with:
 1. Your balance sheet: reporting your current financial position -where you are now.
2. Your cash flow statement: telling you what you received and spent over the past month.
3. Your budget: planning, spending and saving to achieve financial goals.

STEP 2: ESTIMATE INCOME

Maintaining income and expense records makes the budgeting process easier.

STEP 3: BUDGET AND EMERGENCY FUNDS AND SAVINGS

To set aside money for unexpected expenses as well as future financial security. A
very common budgeting mistake is to save only the amount left at the end of the month. When
you do that, you often have nothing left for savings. Since savings are vital to long-term financial
security, advisers suggest that an amount be budgeted as a fixed expense.

STEP 4: BUDGET FIXED EXPENSES

Definite obligations make up this portion of a budget. A budget involves
projected or planned income and expenses. The cash flow statement reports the actual income
and expenses. Assigning amounts to spending categories require careful consideration. The
amount you budget for various items will depend on your current needs and plans for the future.

STEP 5: BUDGET VARIABLE EXPENSES

Variable expenses will fluctuate by a household situation, time of year, health,
economic conditions, and a variety of other factors.

STEP 6: RECORD SPENDING ACCOUNTS

After you have established your spending plan, you will need to keep records of
your actual income and expenses similar to those you keep in preparing an income statement.
The family actual spending is not always the same as planned. A budget variance
is the difference between the amount budgeted and the actual amount received or spent. Budget
deficit is the mount by which actual spending exceeds planned spending. Budget surplus is the
amount by which actual spending is less than planned spending.

STEP 7: REVIEW SPENDING AND SAVING PATTERNS

Prepare an annual summary to compare actual spending with budgeted amounts.
The summary will help you see areas where changes in your budget may be necessary. This
review process is vital to both successful short-term money management and long-term financial
security.

CHARACTERISTICS OF SUCCESSFUL BUDGETING

Well planned
Realistic
Flexible
Clearly communicated

TYPES OF BUDGETING SYSTEMS

 1. Mental budget – exists only in a person’s mind.
2. Physical budget – involves envelopes, folders, or containers to hold money or slips of
paper representing amounts allocated for spending categories.
3. Written budget – allows you to provide a detailed plan for spending. This type of budget
can be in a notebook or on accounting paper or a budget record book available in office
supply stores.
4. Computerized budgeting system – may be developed using spreadsheet software.
5. Online budget – used of various budgeting and personal financial management tools of
different financial institutions uploaded in their website.
6. Budgeting app – used of cellphone or tablet.

MONEY MANAGEMENT AND ACHIEVING FINANCIAL GOALS

Personal financial statements and budget allow you to achieve your financial goals with:

1. Your balance sheet: reporting your current financial position -where you are now
2. Your cash flow statement: telling you what you received and spent over the past month
3. Your budget: planning spending and saving to achieve financial goals

IDENTIFYING SAVING GOALS

Common reasons for saving include:

 To create an emergency fund for irregular and unexpected expenses.
 To pay for replacement of expensive items.
 To buy expensive items.
 To provide for long-term expenses such as education of children or retirement.
 To earn income from the interest on savings for use in paying living expenses.

SELECTING A SAVING TECHNIQUE

1. Write a check each payday to deposit in a separate savings account.
2. Payroll deduction – an amount is deducted from your salary and deposited in savings.
3. Saving coins or spending less on certain items.