What’s the Difference between Budgeting and Financial Planning?
Everyone knows the story of the tortoise and the hare: A speedy hare ridicules a slow-moving tortoise until the tortoise proposes a race. The hare agrees, bolts past the tortoise and then, certain he’ll win, takes a nap break halfway through. The tortoise keeps on, slow and steady, and the hare awakes to find he’s lost the race.
In the world of finances, this is the story of the financial planner and the budgeter. The budgeter moves quickly to meet short-term goals, without considering the long view. The financial planner knows slow and steady wins the race as long as every step moves in the same direction.
Budgeting is an incredibly important financial strategy. It evaluates how much you make, measures how much you spend, and helps you spend less than what you bring in. Financial planning, on the other hand, looks at your current financial state and builds a comprehensive portfolio by predicting future cash flows, asset values and withdrawal plans based on information that’s currently available.
Budgeting, ultimately, considers what you do with your money.
Budgeting focuses on immediate money issues. You look at how much you earn, determine how much it will cost to maintain your current lifestyle, and then decide on a plan. Once you have a plan in place, you build a spreadsheet so you can trace where you’re spending money.
The greatest benefit to budgeting is that you consciously decide where your money is going. Not only does this ensure you balance your checkbook every month and pay your bills in a timely manner, it can give you financial wiggle-room for emergencies or even help you save for retirement.
Financial planning, on the other hand, considers what you can be with your money.
Financial planning considers your entire life. Financial planning also uses math to make decisions about money, but it’s about reaching larger, more long-term goals. It asks, “Who are you? Who do you want to be? How should you modify your current lifestyle to achieve the lifestyle of your dreams?” Perhaps the most important question of financial planning is “How can you get the most out of your life?”
By asking these questions, financial planning forecasts realistic steps you can take as new opportunities arrive. It can project the steps you should take for managing risk for your business, reducing tax liabilities, planning your wedding, having children, supporting your children in college, retiring, and passing on your estate. These steps are determined based on your current lot in life: hence the word realistic.
While budgeting is vital to financial success, it only accounts for what you do with your money. Financial planning, on the other hand, follows a slow-and-steady approach, using money to project a destination.
For help building a comprehensive financial plan, contact McLean today.
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