Many people struggle with financial planning and budgeting, especially those who have a family to feed. From wondering how to prepare a budget to managing salary, it’s not an easy task. How does one even begin financial plans and create a strategy to spend their money properly?
As challenging as that sounds, financial planning and budgeting are two of the most essential and efficient financial strategies that can help you live a stress-free life.
Regardless of how much you earn monthly, you must always track and master finances through proper financial budget planning.
Types of Financial Planning Process
We all have financial targets in life, such as how much to spend, how to save money from salary, ways to maximize financial resources, among many other things. Every person’s target will be different depending on their income, condition, and financial situation, to name a few.
Regardless you need to have a financial plan to manage your money and pave the way towards your financial well-being.
There are many different financial planning processes, but two of the most important and basic ones that you need to know about are:
Personal Financial Planning
As the name suggests, personal financial planning focuses on an individual’s budget, finances, and goals. Creating a plan for your financial resources is one of the most important investments that you can make for yourself.
This financial planning process caters to all those individuals who want to exert greater control over their finances with the help of numerous financial planning strategies.
The goal here is to create a realistic monthly budget, develop a future financial forecast, and organize your financial accounts.
Family Financial Planning
On the other hand, family financial planning involves an individual and their family and analyses the current and future financial affairs. The goal here is to help you and your family be on track to secure your financial future.
A typical family budget involves multiple expenditures such as education, rent, transport, emergency fund, and numerous other things. It would help if you had a proper financial roadmap to make sound financial decisions throughout the year.
Financial Planning Vs. Budgeting – What’s the Difference?
We often used these two terms together; however, they are quite different from each other. Although financial planning and budgeting do share a common goal, which is to remove all your money-related stresses and create a proper plan, they have a few unique characteristics.
Financial planning is quite extensive. It requires you to create a long-term strategy for managing your finances. Financial planning evaluates your current financial state and then helps you draft a comprehensive and detailed portfolio. It does so by considering your asset values and predicting future cash flow, which is all based on the current financial information. Think of it as planning for your future and where you will stand in terms of finances and money.
Budgeting is more short-term and involves day-to-day money management. For instance, if you wish to create a family budget or a monthly budget for the upcoming month, budgeting will help you decide what to allocate and where.
It is a crucial financial strategy to track down your spending habits and daily expenditures to evaluate how much money you can put into savings.
It requires you to assess how much you spend, where you spend, and how much money you are left with at the end of a given month.
Budgeting Rules – Choose the One that Meets Your Needs
When it comes to financial budget planning, several budgeting rules help you with things like managing salary, how to prepare a budget, and how to save money from salary.
These rules are also unique in that they help cater to different areas and aspects of your life. Some common budgeting rules include:
- Car loan budgeting
- House loan budgeting
- Student loan budgeting
- The 70 20 10 rule
- The 50 30 20 rule
Your job is to pick the one that best meets your needs and suits well with your financial situation at hand.
50 30 20 Rule – An Excellent Rule for General Budgeting
There are mainly two types of things that we spend on; the ‘little’ things and the ‘big’ things. The former could include things like your daily lunch, transport, Netflix subscription, etc. The latter comprises large expenses like car payments, rent, and insurance.
While the big things significantly impact our expenditure and you are likely to keep a track on them, it’s the little things that we don’t pay much attention to. There are times when you might feel like your spending is spiraling a little out of control.
For such times, it’s a great idea to have a proper budgeting rule to follow so that you can track your finances, whether big or small.
The popular 50 30 20 rule is a budgeting approach that uses a percentage system to divide your income into different categories or buckets based on percentages. It’s slightly similar to the 70 20 10 rule but offers a more streamlined approach towards budgeting.
The three main expense categories it involves are:
According to the 50 30 20 budget rule, you should allocate 50% of your income to your needs. These typically include things like clothing, utilities, food, insurance, and housing.
From the remaining 50%, 30% needs to go into your income should go to your wants, which comprise of things like hobbies, vacations, dining out, entertainment, and recreational activities.
Lastly, the remaining 20% should be your savings for both short-term and long-term goals. Savings can be utilized for other kinds of needs, such as your mortgage, debt payment, etc.
The plus-point here is that you can further divide your savings into short term and long term savings. The former could include down payment for your car, while the latter can be your child’s college fund, retirement savings, etc.
Quick and Simple Budgeting Tips
Here are a few extra quick and simple tips for financial budget planning to make it a smooth and comfortable journey for you.
- Keep track of when your income is coming.
- Know exactly what bills you need to pay. The good idea is to create a list of recurring bills and allocate the amount that you will need to spend on them.
- Evaluate your expenditures by identifying all non-discretionary and discretionary expenses.
- Know the difference between needs and wants.
- Have a clear saving strategy in mind and make sure your expenditure doesn’t exceed your income.
We, at The Logic of Money, want to help you at every step of your financial planning and budgeting. We aim to help you find happiness in life by being more financially responsible and managing your money in a way that doesn’t affect your present or future.