CHAPTER 5:
BUDGETING
A. BUDGET/BUDGETING DEFINED.
• Budget = is an estimation of revenue and expenses over a specified future
period of time and is usually compiled and re-evaluated on a periodic
basis. Budgets can be made for a person, a family, a group of people, a
business, a government, a country, a multinational organization or just
about anything else that makes and spends money. It is a microeconomic
concept that shows the trade-off made when one good is exchanged for
another. A budget is really just a tool to gain a better and more
accurate insight into your spending habits.
A. BUDGET/BUDGETING DEFINED.
• BUDGETING = is a financial plan that takes income and expenses into account and
provides estimates for how much you make and spend over a given period of time. It is
a written record of income and expenses in a specific time period. Budgets usually run
on a monthly basis.
• BUDGETING = is the process of creating a plan to spend your money. This spending
plan is called budget. Creating this spending plan allows you to determine in advance
whether you will have enough money to do the things you need to do or would like to
do. Budgeting is simply balancing your expenses with your income. Therefore, keeping
you out of debt or help you work your way out of debt if you are currently in debt.
A. BUDGET/BUDGETING DEFINED.
• PERSONAL BUDGET. It is a plan that helps you put the
money you’ve earned toward savings, or paying off debt. This
is extremely useful in managing an individual's or family's
finances over both the short and long-term horizon. A personal
or household budget is an itemized list of expected income and
expenses that helps you to plan for how your money will be
spent or saved, as well as track your actual spending habits.
B. PURPOSE OR IMPORTANCE OF
BUDGETING:
• 1. A budget helps you pay reach your financial goals
• 2. It helps ensure you don’t spend money you don’t have. Far too many consumers
spend money they don't have—and we owe it all to credit cards. However, if you
create and stick to a budget, you'll never find yourself in this precarious position.
You'll know exactly how much money you earn; how much you can afford to spend
each month and how much you need to save.
• 3. It helps you prepare for emergencies. Our budget should include an emergency
fund that consists of at least three to six months’ worth of living expenses. This extra
money will ensure that you don't spiral into the depths of debt after a life crisis.
B. PURPOSE OR IMPORTANCE OF
BUDGETING:
• 4. Gain a clear vision of your finances. With this newly acquired
knowledge about your finances, you can look at how you handle
your money, and identify opportunities to act and make the changes
needed in order to reach your financial goals and the desired results.
• 5. It is a tool to maximize wealth. The main reason for budgeting is
the desire to maximize your wealth by making smart and efficient
use of your money.
B. PURPOSE OR IMPORTANCE OF
BUDGETING:
• 6. It is a Strategic Plan. It will allow you to plan a strategy to take care of
your fixed and variable expenses, and to be able to save money upfront for
expenses that you know are coming later.
• 7. It helps you lead to a Happier Retirement. If you set aside a portion
of your earnings each month or other retirement funds, you'll eventually
build a nice nest egg. Although you may have to sacrifice a little now and
it will be worth it down the road. Nest Egg – is a substantial sum of
money or other assets that have been saved or invested for a specific
purpose.
C. TYPES OF PERSONAL BUDGET:
• 1. The No Budget Budget = this is a kind of a trick when you don’t have a
budget, but believe it or not, there are some people out there that just don’t need
a budget.
• 2. The Spending First Budget = here, just plan your spending each month and
save whatever is left over. This type of budget is when you know your spending
is well below your earning
• 3. The Savings First Budget = this is the pay yourself first version. Saving
should be the priority even if it means sacrificing in other areas. Getting the
snowball rolling may be one of the keys to success in personal finance.
C. TYPES OF PERSONAL BUDGET:
• 4. The Anti Budget = this budget is amazing because it is so easy and yet still checks all
the personal finance check boxes. This concept is super simple. This budget is best for
those that simply aren’t spenders.
• 5. The 50/30/20 Budget = this is the idea to spend 50% on needs, 30% on wants and save
20%.
• 6. The Zero Based Budget = here, you take the amount that you earn each month and then
allocate money for different budget categories until there’s nothing left, or you “zero out”.
• 7. The Spending Ceiling = setting your cap on spending, meaning you set a limit of the
amount of spending you’ll incur within a given period of time.
D. TYPES OF BUDGET:
• 1. Balanced Budget. It is said to be a balanced budget if the estimated
expenditure is equal to expected receipts in a particular financial year or
month. Advocated by many classical economists, this type of budget is
based on the principle of “living within means.”
• 2. Surplus Budget. A budget is said to be a surplus budget if the expected
earnings/income exceed the estimated household/personal expenditure in
a particular financial year or month. This means that the individual’s
earnings are greater than the amount he spends on basic necessities. A
surplus budget denotes the financial affluence of an individual.
D. TYPES OF BUDGET:
• 3. Deficit Budget. It is said to be a deficit budget if the estimated expenditure
exceeds the expected earnings/income in a particular financial year or month.
• Reminder: When you’re creating a budget, it is important to understand the
difference between something you need to have and something you want to
have. Remember to take care of your needs first, so you can think about
saving for what you want. A budget can not only help you consider your
immediate needs and wants, but prepare you to achieve your long-term
financial goals.
E. CHART OF COMPARISON
BETWEEN WANTS AND NEEDS
• Needs and wants are separate forces, that
compels actions for satisfaction. Needs can be
distinguished from wants on the basis of their
level of importance. Hence, it is a distinction
between what is required and what is desired.
E. CHART OF COMPARISON
BETWEEN WANTS AND NEEDS:
Basis for Comparison Needs Wants
Meaning Needs refers to an individual's Wants are described as the goods
basic requirement that must be and services, which an individual
fulfilled, in order to survive. like to have, as a part of his
caprices.
Nature Limited Unlimited
What is it? Something you must have. Something you wish to have.
Represents Necessity Desire
Survival Essential Inessential
Change May remain constant over time. May change over time.
Non-fulfillment May result in onset of disease or May result in disappointment.
even death.
F. IMPORTANT TERMS TO
CONSIDER:
• 1. Cash flows. It’s a business term that refers to the amount of
money coming into and going out of a business over a period of time.
• 2. Cash Inflows. Where does our cash come from? For working
people, salary is the main source of cash inflows. Other sources may
be interest from bank deposits, dividends on shares or rent from
property. Money receive by an organization, a business or an
individual as a result of its operating activities, investment activities
and financing activities.
F. IMPORTANT TERMS TO
CONSIDER:
• 3. Cash Outflows. Where does our cash go? Cash outflows are in the form of
expenses. Expenses will include both large and small. The total outgoing funds in a
given period of time. It includes expenses such as housing, groceries, utilities, life
insurance, healthcare, entertainment, as well as paying any debt held by the
company or an individual.
• The purpose of determining your cash inflows and outflows is to find your net cash
flow. Your net cash flow is simply the result of subtracting your outflow from your
inflow. A positive net cash flow means that you earned more than you spent and that
you have some money left over from that period. On the other hand, a negative net
cash flow shows that you spent more money than you brought in.
