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Financial Security = Budgeting + Financial Planning

October 8, 2013 by Editor, InvestingForMe

We all want financial security. We all want to make enough money to support our lifestyles, raise and educate our children, save for a wonderful retirement, and have fun along the way. So to achieve it all, what will help you more – having a financial plan or a budget? The answer is both!

But I Thought You Said …

Hey, wait a minute, from your last article, I thought you hated financial planning and basically called financial planning one big marketing scam?

Let’s Review

Hold on. What I said was that I am against financial planning when its sole purpose is to make a sale or to market a financial service. Fortunately not all financial planners and financial plans are about making sales (most are, but not all). In actual fact, a well-documented and thought-out financial plan is an essential element when working toward your financial security. And another important element is a complete and accurate budget plan.

Think of Yourself as a Corporation

One good way to view and approach the quest for financial security is to view your personal finances the same way as every corporation and organization does. When it comes to running a successful business two of the most important elements are the budget and financial plan.

A corporation does not view financial planning and budgeting as an “either / or” proposition. They have an annual budget that guides the day-to-day revenue and expense decisions while their financial plan dictates the corporation’s future goals and offers guidance on long-term decisions.

Step 1: Just like a Corporation, Start with the Budget

Just like any successful corporation, you first need an accurate accounting of all your day-to-day revenues, expenses, assets and liabilities.

In financial terms, budgeting is a process whereby you keep track of your current income earned, the daily expenses you incur, the value of your assets and the amount of your debts and liabilities. It is a snapshot of your financial reality today.

Here are the two basic components for a complete budget plan:

  • The Household Budget: This is where you identify and list all of your day-to-day expenses. Accuracy is critical. The old saying “Garbage in, Garbage out!” applies. Don’t just guess and estimate. Find a great budgeting software, spreadsheet, or calculator that is comprehensive and detailed. And don’t settle for a budget that lists only the major items. Did you know that most of our reckless, wasteful spending is in the small items, the small details we subconsciously forget? (Like those daily Timmies or Starbucks pick-me-ups, yet another new hat or sweater in this season’s shade of green, and don’t forget those new shoes, and so on.) Your budget is critical to your eventual success, as it is the foundation for your corporation. Your budgeting goal should be the same as it is for any corporation. In corporate jargon that means maximize the value of every dollar allocated to an expense! Wasteful and errant spending should not be tolerated. (Translation: Get serious! Count every penny you waste on the big and little things … because it all adds up to you losing your bottom line!)
  • Your Net Worth Statement: A net worth statement (corporations call this their balance sheet!) is another basic component to a complete budget plan. It helps to track your progress in accumulating financial wealth (or not). It tracks the current value of your assets and the amount of your loans. Remember, there are only three ways to accumulate wealth: win the lottery, inherit it, or (as is the case for most of us) work hard, watch your spending and pay off your debts. Your net worth statement is a snapshot of your wealth. When the value of your savings and assets increase, so does your net worth. When you pay down your debts, your net worth increases. And if you spend your savings or borrow more money, your net worth declines. Again, accuracy is critical. Don’t just guess and use estimates. (You’re only fooling yourself!) Your net worth statement is like a report card that grades your budgeting activities. It tells you if you got an A+ or you need to “repeat”.

Step 2: Financial Planning (Even Corporations Need to Dream)

Even for corporations the financial planning aspect of working towards financial security is the fun part. The financial plan establishes goals – financial success, financial wealth and financial security!

Just like a corporation, your financial planning should be built around your budget plan. Your budget tells you how much money you have leftover after paying all of your expenses. It tells you how much money you can add to your savings and how much money you have for paying down your debt.

Your financial plan should adopt a corporate approach, not a marketing approach. What do I mean by that? A corporation uses a financial plan with actual numbers as identified by the budget and net worth statements. (Can you imagine if corporations used guesses and mere estimates when coming up with a financial plan? (!*#$!) In other words, you have to do some real math. For example, if your net worth is $100,000 today and you can comfortably save $400.00 per month for the next 20 years, at a reasonable investment rate of return equal to 4.0%, compounded annually, your financial goal would be $362,047.00.

If this financial goal is inadequate, then just like a corporation, you will need to revisit your budget to see how you can increase your revenue, reduce your expenses, or alter your assets to enhance your ability to achieve a greater financial goal. It’s a matter of very real numbers and simple math.

Then There’s the Other Stuff: More Than Just Numbers

Finally, after working with all the real numbers, your financial plan should also consider all those things you can’t control. It consider unknowable and uncontrollable events like births, illness, death, disability, property destruction, etc. Depending upon your personal circumstances, this aspect of your plan may be very simple or very complex. (This is another article just on its own!)

Remember: Your Dreams Must Be Firmly Planted in Reality!

Attaining financial security requires both an accurate budgeting plan and a comprehensive financial plan. Corporations have known this for decades and have recognized the need for both, and so should you. Having a budget without any idea where you are heading is about as useful as having a financial plan without a clue where your finances are today. (It’s kind of like sitting in a rowboat with only one oar.)

So, if you really want to attain financial security, then start by defining where you are financially today by establishing a household budget and a net worth statement. Then establish and define realistic goals within a corporate-style financial plan.


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