Planning, budgeting and forecasting work together to help you achieve financial prosperity. The process starts with planning your short- and long-term goals. Accurate and detailed planning is necessary for budgeting and forecasting to be effective. Budgeting sets aside the money you need for each goal, while forecasting makes adjustments when unexpected life events happen.
Planning includes your current and future goals. Goals vary throughout the different stages of life. For example, an individual in his 20s might aim to work up to management level and travel the world, while someone in his 40s plans to use his extensive experience to start a business. Common goals include home ownership, buying a new car, vacations, early retirement or saving for a special occasion, perhaps a wedding. Each goal needs an estimated cost as well as a completion date. The final planning step is prioritizing the list of goals.
Budgeting includes variable and fixed expenses. Variable expenses are those you can change immediately. For example, people find savings in their food expenses by choosing to prepare all meals at home and brown bag their lunches rather than eating out. Selling a second car can save hundreds of dollars every month in car payments, insurance, gas and maintenance. Fixed expenses are the same amount every month. They include school loans, housing payments and child care expenses. Identify the amount of disposable income that is available to fund your goals. If there is not enough for all of them, start with the highest-priority ones.
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Forecast the yearly budget by reviewing previous spending habits and estimating future expenses. This step also enables you to adjust budgeted amounts when something unexpected happens. For example, you might have budgeted for furnishings, day care and diapers for one child only to find out you are having triplets. Your forecast can adjust expenses upward, but it might not be necessary to lower the amount of budgeted savings. Many budgets have some leeway in entertainment and other variable budget categories. Forecasting is an ongoing process and can change frequently as you review income and expenses to notice any unusual occurrences or new trends, such as an investment that is not as profitable as expected.
Financial prosperity is a slow process that takes several years to achieve, especially the significant amount needed for a comfortable retirement. Plan for unexpected events by having an emergency fund and adequate insurance, as it is the unexpected things in life that wreak havoc on the budget. Review your plans periodically, and make the necessary adjustments as you achieve each goal.
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