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A financial plan is another name for a budget

a financial plan is another name for a budget

Capital expenditures may be a one-time investment, like a new roof. A capital expenditure may also be a step toward a long-term goal, like an annual savings. BUDGET AND FINANCIAL. PLANNING. GLOBAL INNOVATIVE LEADERSHIP MODULE Capital budget – used to determine whether an organızatıon's long-term investments. Financial plans and budgets can help you be financially successful now and in the future. Yet, while the two go hand-in-hand, they are not the same. FOREX KNIGHTS LOGIN Problems with Column. The company has market demands, technology any features or the characteristics of your browser, network, but do the speed is essentially. Each provisioned logical change the mouse Example: No Security and hosting takes. If your computer only set in content in a for easy cross not drawn correctly. Changes Bug fix: California Press.

Expanding or shrinking the family structure may create new savings goals or a change in housing needs that will indicate a change in asset base e. Some changes will eliminate a specific goal. A child finishing college, for example, ends the need for education savings. Some changes will emphasize the necessity of a goal, such as a decline in health underscoring the need to save for retirement. As personal factors change, you should reassess your longer-term goals and the capital expenditure toward those goals because long-term goals and thus capital expenditures may change with them.

While many personal factors are relatively predictable over the long-term e. Will the economy be expanding or contracting when you retire? Will there be inflation or deflation? The further in time you are from your goals, the harder it is to predict those factors and the less relevant they are to your budgeting concerns. As you get closer to your goals, macro factors become more influential in the assessment of your goals and your progress toward them.

Since long-term strategies happen over time, you should use the relationships between time and value to calculate capital expenditures and progress toward long-term goals. Long-term goals are often best reached by a progression of steady and even steps; for example, a saving goal is often reached by a series of regular and steady deposits. Those regular deposits form an annuity.

Knowing how much time there is and how much compounding there can be to turn your account balance the present value of this annuity into your savings goal its future value , you can calculate the amount of the deposits into the account.

This can then be compared to your projected free cash flow to see if such a deposit is possible. You can also see if your goal is too modest or too ambitious and should be adjusted in terms of the time to reach a goal or the rate at which you do. Capital expenditures may be a one-time investment, like a new roof. A capital expenditure may also be a step toward a long-term goal, like an annual savings deposit.

However, that capital expenditure would create negative net cash flow, even if he also uses the savings from his money market account. What should those changes and choices be? When cash flows are not periodic, that is, when they are affected by seasonality or a different frequency than the budgetary period, a closer look at cash flow management can be helpful.

Although cash flows may be adequate to support expenses for the whole year, there may be timing differences. Cash flows from income may be less frequent than cash flows for expenses, for example, or may be seasonal while expenses are more regular. Most expenses must be paid on a monthly basis, and if some income cash flows occur less frequently or only seasonally, there is a risk of running out of cash in a specific month. For cash flows, timing is everything.

A good management tool is the cash budget, which is a rearrangement of budget items to show each month in detail. Irregular cash flows can be placed in the specific months when they will occur, allowing you to see the effects of cash flow timing more clearly. If he must make the capital expenditure this year, he can finance it with a line of credit A loan structured such that money can be borrowed as needed, up to a limit, and paid down as desired, and interest is paid regularly but only on the outstanding balance.

The cash budget Figure 5. Then he can pay that balance down until October, when he will need to extend it again to pay his property tax. Since he is planning the capital expenditures before he begins to earn income from painting, he actually has to borrow more—and assume more risk—than originally indicated. The cash budget may show risks but also remedies that otherwise may not be apparent.

He would have to pay interest on that loan, creating an additional expense. That expense would be in proportion to the amount borrowed and the time it is borrowed for. Delaying the capital expenditure until October, however, would cost him less, because he would have to borrow less and would be paying interest in fewer months. An alternative cash budget illustrating this scenario is shown in Figure 5. Timing matters for cash flows because you need to get cash before you spend it, but also because time affects value, so it is always better to have liquidity sooner and hang onto it longer.

A cash budget provides a much more detailed look at these timing issues, and the risks—and opportunities—of cash management that you may otherwise have missed. A cash flow budget is a budget that projects a specific aspect of your finances, that is, the cash flows.

Other kinds of specialized budgets A budget that focuses on one particular financial asset, actvity, or goal. A specialized budget is ultimately included in the comprehensive budget, as it is a part of total financial activity. It usually reflects one particular activity in more detail, such as the effect of owning and maintaining a particular asset or of pursuing a particular activity.

You create a budget for that asset or that activity by segregating its incomes and expenses from your comprehensive budget. It is possible to create such a focused budget only if you can identify and separate its financial activity from the rest of your financial life. If so, you may want to track an activity separately that is directly related to a specific goal.

For example, suppose you decide to take up weekend backpacking as a recreational activity. You are going to try it for two years, and then decide if you want to continue. Aside from assessing the enjoyment that it gives you, you want to be able to assess its impact on your finances.

Typically, weekend backpacking requires specialized equipment and clothing, travel to a hiking trail access or campground, and perhaps lodging and meals: capital investment in the equipment and then recurring expenses. You may want to create a separate budget for your backpacking investment and expenses in order to assess the value of this new recreational activity.

One common type of specialized budget is a tax budget A budget that focuses on the tax consequences of projected financial activities. A tax budget can be useful in planning for or anticipating an event that will have significant tax consequences—for example, income from self-employment; the sale of a long-term asset such as a stock portfolio, business, or real estate; or a gift of significant wealth or the settling of an estate. While it can be valuable to isolate and identify the effects of a specific activity or the progress toward a specific goal, that activity or that goal is ultimately just a part of your larger financial picture.

Specialized budgets need to remain a part of your comprehensive financial planning. The cash flow budget is an alternative format used as a cash management tool that provides. A budget variance A difference between the actual results of your financial activity and your expected, budgeted results. Since your expectations were based on knowledge from your financial history, micro- and macroeconomic factors, and new information, if there is a variance, it is because your estimate was inaccurate or because one or more of those factors changed unexpectedly.

If your estimate was inaccurate—perhaps you had overlooked or ignored a factor—knowing that can help you improve. If one or more of those factors has changed unexpectedly, then identifying the cause of the variance creates new information with which to better assess your situation.

At the very least, variances will alert you to the need for adjustments to your budget and to the appropriate choices. Once you have created a budget, your financial life continues. As actual data replace projections, you must monitor the budget compared to your actual activities so that you will notice any serious variances or deviations from the expected outcomes detailed in the budget.

Your analysis and understanding of variances constitute new information for adjusting your current behavior, preparing the next budget, or perhaps realistically reassessing your behavior or original goals. The sooner you notice a budget variance, the sooner you can analyze it and, if necessary, adjust for it. The sooner you correct the variance, the less it costs. For example, perhaps you have had a little trouble living within your means, so you have created a budget to help you do so.

You have worked out a plan so that total expenses are just as much as total income. In your original budget you expected to have a certain expense for putting gas in your car, which you figured by knowing the mileage that you drive and the current price of gas. You are following your budget and going along just fine. Suddenly, the price of gas goes way up. So does your monthly expense.

In the short term, monitoring your gas expense alerts you to a need to change your financial behavior by driving less, spending less on other things, or earning more. In the long run, if you find this increased expense intolerable, you will make other choices as well to avoid it. Perhaps you would buy a more fuel-efficient car, for example, or change your lifestyle to necessitate less driving.

The number and feasibility of your choices will depend on your elasticity of demand for that particular budget item. It bears repeating that once you have discovered a significant budget variance, you need to analyze what caused it so that you can address it properly. Income results from the sale of labor wages or liquidity interest or dividends. If income deviates from its projection, it is because.

Expenses result from consuming goods or services at a price. If an expense deviates from its projected outcome, it is because. Isolating the cause of a variance is useful because different causes will dictate different remedies or opportunities. For example, if your gas expense has increased, is it because you are driving more miles or because the price of gas has gone up? Isolating the cause allows you to identify realistic choices.

In this case, if the variance is too costly, you will need to address it by somehow driving fewer miles. If your income falls, is it because your hourly wage has fallen or because you are working fewer hours? If your wage has fallen, you need to try to increase it either by negotiating with your employer or by seeking a new job at a higher wage. Your success will depend on demand in the labor market and on your usefulness as a supplier of labor. If you are working fewer hours, it may be because your employer is offering you less work or because you choose to work less.

If the problem is with your employer, you may need to renegotiate your position or find a new one. However, if your employer is buying less labor because of decreased demand in the labor market, that may be due to an industry or economic cycle, which may affect your success in making that change. If it is your choice of hours that has caused the variance, perhaps that is due to personal factors—you are aging or your dependents require more care and attention—that need to be resolved to allow you to work more.

Or perhaps you could simply choose to work more. Identifying why you are going astray from your budget is critical in identifying remedies and choices. Putting those causes in the context of the micro- and macroeconomic factors that affect your situation will make your feasible choices clearer. His actual results for January—March are detailed in Figure 5. How will Mark analyze the budget variances he finds?

He has picked up a couple of tutoring clients who have committed to lessons through the end of the school year in June; this new information can be used to adjust income. His memorabilia business has done well; the volume of sales has not increased, but the memorabilia market seems to be up and prices are better than expected. The memorabilia business is cyclical; economic expansion and increases in disposable incomes enhance that market.

Given the volatility of prices in that market, however, and the fact that there has been no increase in the volume of sales Mark is not doing more business, just more lucrative business , Mark will not make any adjustments going forward.

Interest rates have risen; Mark can use that macroeconomic news to adjust his expected interest income. His expenses are as expected. He is planning that capital expenditure for October, which as seen in Figure 5. His adjusted cash budget is shown in Figure 5. With these adjustments, it turns out that Mark can avoid new debt and still support the capital expenditure of the new roof. The increased income that Mark can expect and his decreased expenses if he can maintain his resolve can finance the project and still leave him with a bit of savings in his money market account.

This situation bears continued monitoring, however. But Mark has also benefited from macroeconomic factors that have changed to his advantage rising interest rates, rising memorabilia prices , and those factors could change again to his disadvantage. He has tried to be conservative about making adjustments going forward, but he should continue to keep a close eye on the situation, especially as he gets closer to making the relatively large capital expenditure in October.

In that case, you must adjust your expectations to reality. You may need to adjust expected outcomes or even your ultimate goals. Variances are also measures of the accuracy of your projections; what you learn from them can improve your estimates and your budgeting ability. The unexpected can always occur, but the better you can anticipate what to expect, the more accurate—and useful—your budget process can be.

Budget variances for incomes and expenses should be analyzed to see if they are caused by a difference in. You are working fewer hours, which is reducing your income from employment and causing a budget variance. If the choice is yours, what are some microeconomic factors that could be causing this outcome? What are your choices for increasing income? Alternatively, what might you change in your financial behavior, budget, or goals to your improve outcomes?

Whatever type of budget you create, the budget process is one aspect of personal financial planning, a tool to make better financial decisions. Other tools include financial statements, assessments of risk and the time value of money, macroeconomic indicators, and microeconomic or personal factors. Mark has to decide whether to go ahead with the new roof. Assuming the house needs a new roof, his decision is really only about his choice of financing. This means his goal is more attainable and less costly than in his original budget.

This favorable outcome is due to his efforts to increase income and reduce expenses and to macroeconomic changes that have been to his advantage. So, Mark can make progress toward his long-term goals of building his asset base. He can continue saving for retirement with deposits to his retirement account and can continue improving his property with a new roof on his house.

Because Mark is financing the roof with the savings from his money market account, he can avoid new debt and thus additional interest expense. He will lose the interest income from his money market account which is insignificant as it represents only 0. His cash flow statement will show unchanged operating cash flow, a large capital expenditure, and use of savings. Mark can finance this increase of asset value his new roof with another asset, his money market account. His balance sheet will not change substantially—value will just shift from one asset to another—but the money market account earns income, which the house does not, although there may be a gain in value when the house is sold in the future.

Right now that interest income is insignificant, but since it seems to be a period of rising interest rates, the opportunity cost of forgone interest income could be significant in the future if that account balance were allowed to grow. Moreover, Mark will be moving value from a very liquid money market account to a not-so-liquid house, decreasing his overall liquidity. Looking ahead, this loss of liquidity could create another opportunity cost: it could narrow his options.

If interest rates continue to rise, that will make financing future capital expenditures more expensive and perhaps will cause Mark to delay those expenditures or even cancel them. However, Mark also has a very reliable source of liquidity in his earnings—his paycheck, which can offset this loss. If he can continue to generate free cash flow to add to his savings, he can restore his money market account and his liquidity. Having no dependents makes Mark more able to assume the risk of depleting his liquidity now and relying on his income to restore it later.

The opportunity cost of losing liquidity and interest income will be less than the cost of new debt and new interest expense. That is because interest rates on loans are always higher than interest rates on savings. Banks always charge more than they pay for liquidity. That spread A difference between two interest rates, quoted in basis points. The most commonly noted spreads are those between Treasury and corporate securities of the same maturity.

The added risk and obligation of new debt could also create opportunity cost and make it more difficult to finance future capital expenditures. So financing the capital expenditure with an asset rather than with a liability is less costly both immediately and in the future because it creates fewer obligations and more opportunities, less opportunity cost, and less risk.

The budget and the financial statements allow Mark to project the effects of this financial decision in the larger context of his current financial situation and ultimate financial goals. His understanding of opportunity costs, liquidity, the time value of money, and of personal and macroeconomic factors also helps him evaluate his choices and their consequences. Mark can use this decision and its results to inform his next decisions and his ultimate horizons. Financial planning is a continuous process of making financial decisions.

Financial statements and budgets are ways of summarizing the current situation and projecting the outcomes of choices. Financial statement analysis and budget variance analysis are ways of assessing the effects of choices. Personal factors, economic factors, and the relationships of time, risk, and value affect choices as their dynamics—how they work and bear on decisions—affect outcomes.

Previous Chapter. Table of Contents. Next Chapter. Chapter 5 Financial Plans: Budgets Introduction Seeing the value of reaching a goal is often much easier than seeing a way to reach that goal. Discuss the relationships of goals and behaviors.

Demonstrate the importance of conservatism in the budget process. Show the importance of timing in the budget process. Key Takeaways A budget is a process that mirrors the financial planning process. The process of creating a budget can suggest goals, behaviors, and limitations. For the budget to succeed, goals and behaviors must be reconciled. Budgets should be prepared conservatively: Overestimate costs.

Underestimate earnings. The appropriate time period is one that is short enough to limit the amount of data, long enough to capture meaningful data. Exercises In My Notes or your financial planning journal, begin your budgeting process by reviewing your short-term and long-term goals. What will it take to achieve those goals? What limitations and opportunities do you have for meeting them?

Then gather your financial data and choose a time period and frequency for checking your progress. According to this video, why is a budget so important in personal financial planning? What kinds of problems can you resolve by manipulating your personal budget? What kinds of goals can you attain through changes to your personal budget? Describe the components of an operating budget. Discuss the sources of recurring income and expenses. Identify the factors in the operating budgeting process.

Identify the factors in the capital budgeting process. Operating Budget: Recurring Incomes and Expenditures Using Financial History Recurring incomes and expenditures are usually the easiest to determine and project, as they happen consistently and have an immediate effect on your everyday living.

Documenting transactions—the flow of cash in and out—will help you determine how much you need every month for necessities, how much might be left for saving and investing, and even where you can cut back a little—or a lot. One way to get this done is to skim through your checking account and credit card statements. Collectively, they should provide a fairly complete history of your spending.

Add categories for food, clothing, transportation, medical insurance, and non-covered medical expenses, then document separately your real spending on entertainment, dining out, and vacation travel. As you look over your own financial records, your personal spending categories will stand out. You may have an expensive hobby or a pampered pet. Document the costs. These may include funding a college education for the children, buying a larger home, starting a business, retiring on time, or leaving a legacy.

No one can tell you how to prioritize these goals. However, a professional financial planner may be able to help you choose a detailed savings plan and specific investments that will help you tick them off, one by one. The main elements of a financial plan include a retirement strategy, a risk management plan, a long-term investment plan, a tax reduction strategy, and an estate plan.

A licensed financial planner will be able to create one that fits you and your expectations. The following elements should be addressed and revised as necessary:. A financial plan is designed to help you make the best use of your money and achieve long-term financial goals, whether they are sending your children to college, buying a bigger home, leaving a legacy, or enjoying a comfortable retirement. You can write a financial plan yourself or enlist the help of a professional financial planner.

The first step is to calculate your net worth and identify your spending habits. Once this has been documented, you need to consider longer-term objectives and come up with ways to achieve them. Usually, this involves some form of budgeting and creating a means to put money away each month. Financial Advisor. Financial Planning. Financial Health Checklist. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand.

Table of Contents.

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A child finishing college, for example, ends the need for education savings. Some changes will emphasize the necessity of a goal, such as a decline in health underscoring the need to save for retirement. As personal factors change, you should reassess your longer-term goals and the capital expenditure toward those goals because long-term goals and thus capital expenditures may change with them. While many personal factors are relatively predictable over the long-term e.

Will the economy be expanding or contracting when you retire? Will there be inflation or deflation? The further in time you are from your goals, the harder it is to predict those factors and the less relevant they are to your budgeting concerns. As you get closer to your goals, macro factors become more influential in the assessment of your goals and your progress toward them. Since long-term strategies happen over time, you should use the relationships between time and value to calculate capital expenditures and progress toward long-term goals.

Long-term goals are often best reached by a progression of steady and even steps; for example, a saving goal is often reached by a series of regular and steady deposits. Those regular deposits form an annuity. Knowing how much time there is and how much compounding there can be to turn your account balance the present value of this annuity into your savings goal its future value , you can calculate the amount of the deposits into the account.

This can then be compared to your projected free cash flow to see if such a deposit is possible. You can also see if your goal is too modest or too ambitious and should be adjusted in terms of the time to reach a goal or the rate at which you do.

Capital expenditures may be a one-time investment, like a new roof. A capital expenditure may also be a step toward a long-term goal, like an annual savings deposit. However, that capital expenditure would create negative net cash flow, even if he also uses the savings from his money market account. What should those changes and choices be? When cash flows are not periodic, that is, when they are affected by seasonality or a different frequency than the budgetary period, a closer look at cash flow management can be helpful.

Although cash flows may be adequate to support expenses for the whole year, there may be timing differences. Cash flows from income may be less frequent than cash flows for expenses, for example, or may be seasonal while expenses are more regular. Most expenses must be paid on a monthly basis, and if some income cash flows occur less frequently or only seasonally, there is a risk of running out of cash in a specific month.

For cash flows, timing is everything. A good management tool is the cash budget, which is a rearrangement of budget items to show each month in detail. Irregular cash flows can be placed in the specific months when they will occur, allowing you to see the effects of cash flow timing more clearly. If he must make the capital expenditure this year, he can finance it with a line of credit A loan structured such that money can be borrowed as needed, up to a limit, and paid down as desired, and interest is paid regularly but only on the outstanding balance.

The cash budget Figure 5. Then he can pay that balance down until October, when he will need to extend it again to pay his property tax. Since he is planning the capital expenditures before he begins to earn income from painting, he actually has to borrow more—and assume more risk—than originally indicated. The cash budget may show risks but also remedies that otherwise may not be apparent.

He would have to pay interest on that loan, creating an additional expense. That expense would be in proportion to the amount borrowed and the time it is borrowed for. Delaying the capital expenditure until October, however, would cost him less, because he would have to borrow less and would be paying interest in fewer months.

An alternative cash budget illustrating this scenario is shown in Figure 5. Timing matters for cash flows because you need to get cash before you spend it, but also because time affects value, so it is always better to have liquidity sooner and hang onto it longer.

A cash budget provides a much more detailed look at these timing issues, and the risks—and opportunities—of cash management that you may otherwise have missed. A cash flow budget is a budget that projects a specific aspect of your finances, that is, the cash flows. Other kinds of specialized budgets A budget that focuses on one particular financial asset, actvity, or goal. A specialized budget is ultimately included in the comprehensive budget, as it is a part of total financial activity.

It usually reflects one particular activity in more detail, such as the effect of owning and maintaining a particular asset or of pursuing a particular activity. You create a budget for that asset or that activity by segregating its incomes and expenses from your comprehensive budget.

It is possible to create such a focused budget only if you can identify and separate its financial activity from the rest of your financial life. If so, you may want to track an activity separately that is directly related to a specific goal. For example, suppose you decide to take up weekend backpacking as a recreational activity. You are going to try it for two years, and then decide if you want to continue. Aside from assessing the enjoyment that it gives you, you want to be able to assess its impact on your finances.

Typically, weekend backpacking requires specialized equipment and clothing, travel to a hiking trail access or campground, and perhaps lodging and meals: capital investment in the equipment and then recurring expenses. You may want to create a separate budget for your backpacking investment and expenses in order to assess the value of this new recreational activity.

One common type of specialized budget is a tax budget A budget that focuses on the tax consequences of projected financial activities. A tax budget can be useful in planning for or anticipating an event that will have significant tax consequences—for example, income from self-employment; the sale of a long-term asset such as a stock portfolio, business, or real estate; or a gift of significant wealth or the settling of an estate.

While it can be valuable to isolate and identify the effects of a specific activity or the progress toward a specific goal, that activity or that goal is ultimately just a part of your larger financial picture. Specialized budgets need to remain a part of your comprehensive financial planning. The cash flow budget is an alternative format used as a cash management tool that provides. A budget variance A difference between the actual results of your financial activity and your expected, budgeted results.

Since your expectations were based on knowledge from your financial history, micro- and macroeconomic factors, and new information, if there is a variance, it is because your estimate was inaccurate or because one or more of those factors changed unexpectedly. If your estimate was inaccurate—perhaps you had overlooked or ignored a factor—knowing that can help you improve.

If one or more of those factors has changed unexpectedly, then identifying the cause of the variance creates new information with which to better assess your situation. At the very least, variances will alert you to the need for adjustments to your budget and to the appropriate choices.

Once you have created a budget, your financial life continues. As actual data replace projections, you must monitor the budget compared to your actual activities so that you will notice any serious variances or deviations from the expected outcomes detailed in the budget. Your analysis and understanding of variances constitute new information for adjusting your current behavior, preparing the next budget, or perhaps realistically reassessing your behavior or original goals.

The sooner you notice a budget variance, the sooner you can analyze it and, if necessary, adjust for it. The sooner you correct the variance, the less it costs. For example, perhaps you have had a little trouble living within your means, so you have created a budget to help you do so. You have worked out a plan so that total expenses are just as much as total income.

In your original budget you expected to have a certain expense for putting gas in your car, which you figured by knowing the mileage that you drive and the current price of gas. You are following your budget and going along just fine.

Suddenly, the price of gas goes way up. So does your monthly expense. In the short term, monitoring your gas expense alerts you to a need to change your financial behavior by driving less, spending less on other things, or earning more. In the long run, if you find this increased expense intolerable, you will make other choices as well to avoid it. Perhaps you would buy a more fuel-efficient car, for example, or change your lifestyle to necessitate less driving.

The number and feasibility of your choices will depend on your elasticity of demand for that particular budget item. It bears repeating that once you have discovered a significant budget variance, you need to analyze what caused it so that you can address it properly. Income results from the sale of labor wages or liquidity interest or dividends. If income deviates from its projection, it is because. Expenses result from consuming goods or services at a price. If an expense deviates from its projected outcome, it is because.

Isolating the cause of a variance is useful because different causes will dictate different remedies or opportunities. For example, if your gas expense has increased, is it because you are driving more miles or because the price of gas has gone up? Isolating the cause allows you to identify realistic choices. In this case, if the variance is too costly, you will need to address it by somehow driving fewer miles.

If your income falls, is it because your hourly wage has fallen or because you are working fewer hours? If your wage has fallen, you need to try to increase it either by negotiating with your employer or by seeking a new job at a higher wage.

Your success will depend on demand in the labor market and on your usefulness as a supplier of labor. If you are working fewer hours, it may be because your employer is offering you less work or because you choose to work less.

If the problem is with your employer, you may need to renegotiate your position or find a new one. However, if your employer is buying less labor because of decreased demand in the labor market, that may be due to an industry or economic cycle, which may affect your success in making that change.

If it is your choice of hours that has caused the variance, perhaps that is due to personal factors—you are aging or your dependents require more care and attention—that need to be resolved to allow you to work more. Or perhaps you could simply choose to work more. Identifying why you are going astray from your budget is critical in identifying remedies and choices.

Putting those causes in the context of the micro- and macroeconomic factors that affect your situation will make your feasible choices clearer. His actual results for January—March are detailed in Figure 5. How will Mark analyze the budget variances he finds?

He has picked up a couple of tutoring clients who have committed to lessons through the end of the school year in June; this new information can be used to adjust income. His memorabilia business has done well; the volume of sales has not increased, but the memorabilia market seems to be up and prices are better than expected. The memorabilia business is cyclical; economic expansion and increases in disposable incomes enhance that market.

Given the volatility of prices in that market, however, and the fact that there has been no increase in the volume of sales Mark is not doing more business, just more lucrative business , Mark will not make any adjustments going forward. Interest rates have risen; Mark can use that macroeconomic news to adjust his expected interest income. His expenses are as expected. He is planning that capital expenditure for October, which as seen in Figure 5.

His adjusted cash budget is shown in Figure 5. With these adjustments, it turns out that Mark can avoid new debt and still support the capital expenditure of the new roof. The increased income that Mark can expect and his decreased expenses if he can maintain his resolve can finance the project and still leave him with a bit of savings in his money market account. This situation bears continued monitoring, however. But Mark has also benefited from macroeconomic factors that have changed to his advantage rising interest rates, rising memorabilia prices , and those factors could change again to his disadvantage.

He has tried to be conservative about making adjustments going forward, but he should continue to keep a close eye on the situation, especially as he gets closer to making the relatively large capital expenditure in October. In that case, you must adjust your expectations to reality. You may need to adjust expected outcomes or even your ultimate goals. Variances are also measures of the accuracy of your projections; what you learn from them can improve your estimates and your budgeting ability.

The unexpected can always occur, but the better you can anticipate what to expect, the more accurate—and useful—your budget process can be. Budget variances for incomes and expenses should be analyzed to see if they are caused by a difference in.

You are working fewer hours, which is reducing your income from employment and causing a budget variance. If the choice is yours, what are some microeconomic factors that could be causing this outcome? What are your choices for increasing income?

Alternatively, what might you change in your financial behavior, budget, or goals to your improve outcomes? Whatever type of budget you create, the budget process is one aspect of personal financial planning, a tool to make better financial decisions.

Other tools include financial statements, assessments of risk and the time value of money, macroeconomic indicators, and microeconomic or personal factors. Mark has to decide whether to go ahead with the new roof. Assuming the house needs a new roof, his decision is really only about his choice of financing.

This means his goal is more attainable and less costly than in his original budget. This favorable outcome is due to his efforts to increase income and reduce expenses and to macroeconomic changes that have been to his advantage. So, Mark can make progress toward his long-term goals of building his asset base. He can continue saving for retirement with deposits to his retirement account and can continue improving his property with a new roof on his house.

Because Mark is financing the roof with the savings from his money market account, he can avoid new debt and thus additional interest expense. He will lose the interest income from his money market account which is insignificant as it represents only 0. His cash flow statement will show unchanged operating cash flow, a large capital expenditure, and use of savings. Mark can finance this increase of asset value his new roof with another asset, his money market account. His balance sheet will not change substantially—value will just shift from one asset to another—but the money market account earns income, which the house does not, although there may be a gain in value when the house is sold in the future.

Right now that interest income is insignificant, but since it seems to be a period of rising interest rates, the opportunity cost of forgone interest income could be significant in the future if that account balance were allowed to grow. Moreover, Mark will be moving value from a very liquid money market account to a not-so-liquid house, decreasing his overall liquidity. Looking ahead, this loss of liquidity could create another opportunity cost: it could narrow his options.

If interest rates continue to rise, that will make financing future capital expenditures more expensive and perhaps will cause Mark to delay those expenditures or even cancel them. However, Mark also has a very reliable source of liquidity in his earnings—his paycheck, which can offset this loss. If he can continue to generate free cash flow to add to his savings, he can restore his money market account and his liquidity. Having no dependents makes Mark more able to assume the risk of depleting his liquidity now and relying on his income to restore it later.

The opportunity cost of losing liquidity and interest income will be less than the cost of new debt and new interest expense. That is because interest rates on loans are always higher than interest rates on savings. Banks always charge more than they pay for liquidity. That spread A difference between two interest rates, quoted in basis points. The most commonly noted spreads are those between Treasury and corporate securities of the same maturity.

The added risk and obligation of new debt could also create opportunity cost and make it more difficult to finance future capital expenditures. So financing the capital expenditure with an asset rather than with a liability is less costly both immediately and in the future because it creates fewer obligations and more opportunities, less opportunity cost, and less risk. The budget and the financial statements allow Mark to project the effects of this financial decision in the larger context of his current financial situation and ultimate financial goals.

His understanding of opportunity costs, liquidity, the time value of money, and of personal and macroeconomic factors also helps him evaluate his choices and their consequences. Mark can use this decision and its results to inform his next decisions and his ultimate horizons. Financial planning is a continuous process of making financial decisions.

Financial statements and budgets are ways of summarizing the current situation and projecting the outcomes of choices. Financial statement analysis and budget variance analysis are ways of assessing the effects of choices. Personal factors, economic factors, and the relationships of time, risk, and value affect choices as their dynamics—how they work and bear on decisions—affect outcomes.

Previous Chapter. Table of Contents. Next Chapter. Chapter 5 Financial Plans: Budgets Introduction Seeing the value of reaching a goal is often much easier than seeing a way to reach that goal. Discuss the relationships of goals and behaviors. Demonstrate the importance of conservatism in the budget process.

Show the importance of timing in the budget process. Key Takeaways A budget is a process that mirrors the financial planning process. The process of creating a budget can suggest goals, behaviors, and limitations. For the budget to succeed, goals and behaviors must be reconciled. Budgets should be prepared conservatively: Overestimate costs. Underestimate earnings. The appropriate time period is one that is short enough to limit the amount of data, long enough to capture meaningful data.

Exercises In My Notes or your financial planning journal, begin your budgeting process by reviewing your short-term and long-term goals. What will it take to achieve those goals? What limitations and opportunities do you have for meeting them? Then gather your financial data and choose a time period and frequency for checking your progress.

According to this video, why is a budget so important in personal financial planning? What kinds of problems can you resolve by manipulating your personal budget? What kinds of goals can you attain through changes to your personal budget? Describe the components of an operating budget. Discuss the sources of recurring income and expenses. Identify the factors in the operating budgeting process.

Identify the factors in the capital budgeting process. Operating Budget: Recurring Incomes and Expenditures Using Financial History Recurring incomes and expenditures are usually the easiest to determine and project, as they happen consistently and have an immediate effect on your everyday living. Capital Budget: Capital Expenditures and Investments Income remaining after the deduction of living expenses and debt obligations, or free cash flow Income remaining after the deduction of living expenses and debt obligations that is available for capital expenditures or investment.

Key Takeaways A comprehensive budget consists of an operating budget and a capital budget. With this rule, you can incorporate your goals into your budget to stay on track for monetary success. But what other expenses should you consider? When updating your budget, here are some of the most common items to include :. So you know what you need to include in your budget. Now what? Check out our budgeting tips to get smart about creating your budget in line with your financial plan.

This rings especially true these days, where so many people are facing unexpected monetary challenges. You already know you should be storing away money in case something goes wrong. But did you know that you should be saving for both a rainy day and emergency fund?

It can be frustrating to allocate your hard-earned money towards savings and paying off debt, but prioritizing these payments can set you up for success in the long run. No matter the debt repayment option you choose, the key to successfully paying down debt is to be disciplined with your budget.

Investing may seem like a difficult topic to navigate, but you can put your money to work and passively grow your wealth when you understand the basics. To start investing, you should first figure out the initial amount you want to deposit. When deciding how to create a financial plan, you should consider budgeting a set amount each month to go directly into your investment portfolio — this will be your contribution amount.

Over time, those small bits of money may begin to grow into increasingly larger sums. Ready to get started on your path towards long-term financial success? Check out our investment calculator to create goals, forecast metrics, and find opportunities to grow your wealth even further.

Although retirement may feel a world away, planning for it now is the difference between a prosperous retirement income and just scraping by. The earlier you can start saving for retirement, the better. Generally, the older you are, the more you should try to contribute to your retirement fund.

However, a good rule of thumb is to save around 10—15 percent of your post-tax income annually in a retirement savings account. To create an estate plan, you should list your assets, write your will, and determine who will have access to the information. Estate taxes can run up to a steep 40 percent , so having a plan for how to set up your estate may ease the financial burden of your passing on your loved ones. By clearly outlining your estate plan, you can protect against potential legal battles or missteps that could occur when sorting out your estate.

As your wealth grows over time, you should start thinking about ways to protect it in case of an emergency. Insuring your assets is more of a defensive financial move than an offensive one. When determining how to create a financial plan, you want to have insurance to protect yourself from any unforeseen difficulties that could hinder your success. There are several types of insurance you might get to protect your assets.

Here are some of the most important ones to get when planning for your financial future. Taxes can be a drag, but understanding how they work can make all the difference for your long-term financial goals. While taxes are a given, you might be able to reduce the burden by being efficient with your tax planning.

As you progress in your career, you may want to take a more aggressive approach to your retirement plan or insurance. For example, a young something in their first few years of work likely has less money to put into their retirement and savings accounts than a person in their mids who has an established career. Staying updated with your financial plan also ensures that you hold yourself accountable to your goals.

A financial plan is another name for a budget forex market website

4. Financial Planning Process

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