Budgeting and Budget Analysis
GOLLIHUGH FINANCIAL SERVICES
4 DUNNINGTON COURT
SPRINGBORO OHIO 45066
937-748-4504
Budgeting is a time consuming and yet essential task. It requires a comprehensive analysis of how money is being spent and at what rate investing is being made to achieve short and long range goals. To manage money effectively, clients need to learn how to plan their budgets.
It is necessary to project income, document how money is spent and invested, and compare projected to actual figures. This can only be accomplished if accurate detailed accounts of income and spending patterns are maintained. This sounds more difficult than it is. Related data can be retrieved from income tax returns, home improvement records, bank and credit card statements, and various other statements such as a balance sheet, and income statement, insurance policies, retirement and social security information, pension benefits and checkbook records.
Preparing personal budgets and performing an effective analysis require three steps.
• Establishing reasonable goals and objectives
• Determining the clients current financial situation
• Forecasting future expenses and income
The first step is to classify goals and objectives based on a time horizon. For example, short term goals may be defined as goals to be achieved in a period from six months to one year. Intermediate term goals could be defined as goals to be accomplished within one to five years. Long-term goals may be defined as goals that do not fall within the first two classifications.
The second step is to determine the client’s current financial situation. This must be a two step process. The first step is to analyze expenses and incomes over the last six months to one year. This process is necessary to determine what regular and lump sum costs have been incurred. During this exercise is a perfect time to determine if a client has adequate life, health, homeowners, auto, and other appropriate insurances. Also, expenses should be organized by category, divided by month, and segregated as to fixed or variable. Many expenses by their very nature are both fixed and variable. These expenses should be categorized as fixed expenses, but with emphasis on controlling the variable portion of that expenditure. Some expenses that are normally incurred have tax consequences. Examples of these would be mortgage interest, real estate taxes, and charitable contributions. Recording all expenses may also have the positive result of discouraging clients from unnecessary spending.
The third step in budgeting and analyzing expenditures is to realistically forecast future monthly revenue from salary, business income, interest, dividends, or any other appropriate source. In this process, we must also identify and determine realistic amounts for all expenses. Usually, this process is best completed on a monthly basis. However, depending on circumstances it may be necessary to complete the process using other time periods. Regardless of the time period used, all income and expenses must be analyzed for a period of not less than one year. It is imperative that all expenses be considered including vacations, holiday gifts, and taxes.
The goal of this entire process is not simply to balance income with expense. This exercise must enable us to accomplish the client’s goals and create a reserve for savings.
Once a savings goal has been established, it is the responsibility of all concerned to maximize the return on accumulated savings. This may be accomplished in several fashions, but consideration of the client’s goals and risk tolerance are mandatory.
Care should be taken to achieve proper diversification and safety, while maximizing returns. Additionally, any plan which is implemented must be reviewed regularly to assure goals are being met.
4 DUNNINGTON COURT
SPRINGBORO OHIO 45066
937-748-4504
Budgeting is a time consuming and yet essential task. It requires a comprehensive analysis of how money is being spent and at what rate investing is being made to achieve short and long range goals. To manage money effectively, clients need to learn how to plan their budgets.
It is necessary to project income, document how money is spent and invested, and compare projected to actual figures. This can only be accomplished if accurate detailed accounts of income and spending patterns are maintained. This sounds more difficult than it is. Related data can be retrieved from income tax returns, home improvement records, bank and credit card statements, and various other statements such as a balance sheet, and income statement, insurance policies, retirement and social security information, pension benefits and checkbook records.
Preparing personal budgets and performing an effective analysis require three steps.
• Establishing reasonable goals and objectives
• Determining the clients current financial situation
• Forecasting future expenses and income
The first step is to classify goals and objectives based on a time horizon. For example, short term goals may be defined as goals to be achieved in a period from six months to one year. Intermediate term goals could be defined as goals to be accomplished within one to five years. Long-term goals may be defined as goals that do not fall within the first two classifications.
The second step is to determine the client’s current financial situation. This must be a two step process. The first step is to analyze expenses and incomes over the last six months to one year. This process is necessary to determine what regular and lump sum costs have been incurred. During this exercise is a perfect time to determine if a client has adequate life, health, homeowners, auto, and other appropriate insurances. Also, expenses should be organized by category, divided by month, and segregated as to fixed or variable. Many expenses by their very nature are both fixed and variable. These expenses should be categorized as fixed expenses, but with emphasis on controlling the variable portion of that expenditure. Some expenses that are normally incurred have tax consequences. Examples of these would be mortgage interest, real estate taxes, and charitable contributions. Recording all expenses may also have the positive result of discouraging clients from unnecessary spending.
The third step in budgeting and analyzing expenditures is to realistically forecast future monthly revenue from salary, business income, interest, dividends, or any other appropriate source. In this process, we must also identify and determine realistic amounts for all expenses. Usually, this process is best completed on a monthly basis. However, depending on circumstances it may be necessary to complete the process using other time periods. Regardless of the time period used, all income and expenses must be analyzed for a period of not less than one year. It is imperative that all expenses be considered including vacations, holiday gifts, and taxes.
The goal of this entire process is not simply to balance income with expense. This exercise must enable us to accomplish the client’s goals and create a reserve for savings.
Once a savings goal has been established, it is the responsibility of all concerned to maximize the return on accumulated savings. This may be accomplished in several fashions, but consideration of the client’s goals and risk tolerance are mandatory.
Care should be taken to achieve proper diversification and safety, while maximizing returns. Additionally, any plan which is implemented must be reviewed regularly to assure goals are being met.
posted by crg1 at 9:36 AM
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