Jan 23 2009
Guidelines for establishing a Budget. Learn the Pros and Cons on Budgeting.
Here are some guidelines you can use when establishing a budget:
1. Make the budget flexible enough so that it will work even if there are emergencies, unexpected opportunities, or other unforeseen circumstances.
2. Keep the budget period short enough so that the estimates you make will involve the minimum amount of guesswork.
3. Establish a budget period long enough to utilize an investment strategy and a workable series of investment procedures. A typical family budget will cover twelve months and coincide with a calendar year.
4. Make the budget simple, short, and understandable.
5. Follow the form and content of the budget consistently.
6. Eliminate any extraneous information.
7. Do not attempt to obtain absolute accuracy, especially with insignificant items.
8. Tailor the budget to specific goals and objectives.
9. Remember that a budget is also a guideline against which actual results are to be measured. Unexpected results, highlighted by comparison with the budget, should be analyzed. It may be that the unexpected variance is in fact the norm, and should therefore be incorporated in a revised budget.
10. Determine, in advance, all the variables that may influence the amounts of specific items of income and expenditures. Income items include expected annual raises and increases or decreases in interest or dividend rates. Expenditures include increased costs, changing tastes or preferences, or changes in family circumstances.
ADVANTAGES OF BUDGETING
1. Budgeting helps coordinate activity of the investor and financial counselor/advisor in developing objectives.
2. Budgeting reveals inefficient, ineffective, or unusual utilization of resources.
3. Budgeting makes family members aware of the need to conserve resources and helps to allocate roles in achieving overall financial objectives to various individuals.
4. Budgeting provides a means of financial self-evaluation and a guideline to measure actual performance.
5. Budgeting allows the recognition and forces the anticipation of problems before they occur and, thus, permits corrective action or preparation to be taken.
6. Budgeting highlights the possibility of, and the need for, alternative courses of action.
7. Budgeting provides a motivation for performance.
DISADVANTAGES OF BUDGETING
1. To the extent the data utilized are inaccurate, the conclusions drawn from the budget may be misleading.
2. Many individuals have a psychological aversion to the record keeping required and may not maintain sufficient information for the budget to be of use.
3. A rote dependence on budgeted numbers inhibits creativity, tends to stifle “risk taking,” and encourages mechanical thinking. Such an investor may forfeit opportunities or fail to minimize losses.
Computer software does wonders for the record keeping aspect of budgeting. I have a file for each month that I keep all of my receipts in - then I reconcile against the bank statements and the electronic record from the computer. Budgets work if you work them correctly.