![]() Whether it results in sobering dismay or ambitious joy, the budget process is one of reconciling your financial realities to your financial dreams. On the other hand, this can be a process of happy discovery: goals may be closer or require less sacrifice than you may have thought. For example, you may recognize that greater sacrifices need to be made, or that you must change your behavior, or even that your goals are unattainable and should be more realistic-perhaps based on less desirable choices. Financial statements are useful summaries of the information you need to create a budget.Īfter formulating realistic expectations based on past behavior and current circumstances, you still must reconcile your future behavior with your original expectations. If you have been using personal finance software, it has been keeping those records for you if not, a thorough review of your checkbook and investment statements will reveal that information. Your assumptions may come from your actual past behavior based on accurate records that you have gathered. Creating a budget involves projecting realistic behavior. ![]() The process of creating a budget can be instructive. This long-term goal may indicate a need to start a savings plan for a down payment. In the short-term you could look for an apartment with lower rent, but in the long run, it may be more advantageous to own a home. ![]() ![]() For example, an immediate goal may be to lower housing expense. A budget should never be merely followed but should constantly be revised to reflect new information.Ī review of your financial statements or your current financial condition-as well as your own ideas about how you are and could be living-should indicate immediate and longer-term goals. It is more a document of action than of reflection.Īs an action statement, a budget is meant to be dynamic, a reconciliation of “facts on the ground” and “castles in the air.” While financial statements are summaries of historic reality, that is, of all that has already happened and is “sunk,” budgets reflect the current realities that define the next choices. While the need to do such things may be brought into sharper focus by the financial statements, the budget provides an actual plan for doing so. Later, when you compare actual results to the original plan, you can see how shortfalls or successes can point to future strategies.īudgets are usually created with a specific goal in mind: to cut living expenses, to increase savings, or to save for a specific purpose such as education or retirement. When projected in the form of a budget A projection of the financial requirements and consequences of a plan., figures become not only an estimated result but also an actual strategy or plan, a map illustrating a path to achieve a goal. They can also be used as a tool to plan for certain results. Pro forma financial statements provide a look at the potential results of financial decisions. ![]() But while they are not lacking sincerity, determination, or effort, they nevertheless fall short for want of a plan, a map, a picture of why and how to get from here to there. People often resolve to somehow improve themselves or their lives. Seeing the value of reaching a goal is often much easier than seeing a way to reach that goal. ![]()
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