by Personal Budget
A personal budget or home budget is a finance plan that allocates future personal income towards expenses, savings and debt repayment. Past spending and personal debt are considered when creating a personal budget. There are several methods and tools available for creating, using and adjusting a personal budget. For example, jobs are an income source, while bills and rent payments are expenses.
Purpose
A budget should have a purpose or defined goal that is achieved within a certain time period. Knowing the source and amount of income and the amounts allocated to expense events are as important as when those cash flow events occur. Budgeting’s ultimate goal is to plan different phases of corporate operations, coordinate the actions of various divisions within the company, and maintain effective management.
A budget seeks to achieve the following goals in order to reach this goal:
To forecast the firm’s future sales, manufacturing costs, and other expenses in order to maximise profits while reducing the risk of business losses.
- To forecast the firm’s future financial situation and the requirement for cash to be used in the business in order to keep the company sustainable.
- To determine the capitalization composition in order to ensure that funds are available at a fair cost.
- To coordinate the activities of the firm’s many departments toward shared goals.
- To improve the efficiency of the company’s operations across departments, divisions, and cost centres.
- To establish the roles and duties of various department leaders.
- To establish the roles and duties of various department leaders.
- To use the budgeting system to enhance centralised control of the company.
The 60% Solution
The 60% Solution is a budgeting system created by former MSN Money’s editor-in-chief, Richard Jenkins. The name “The 60% Solution” originates from Jenkins’ suggestion on spending 60% of a household’s gross income (before taxes) on fixed expenses. Fixed expenses includes federal, state and Social Security taxes, insurance, regular bills and living expenses such as food and clothing, car and house payments.
The other 40% breaks down as follows, with 10% allocated to each category:
- Retirement: Money set aside into a pension or other retirement account (in the United States this may include an CPF, EPF, PPF etc.
- Long-term savings: Money set aside for car purchases, major home fix-ups, or to pay down substantial debt loads.
- Irregular expenses: Vacations, major repair bills, new appliances, etc.
- Fun money: Money set aside for entertainment purposes.
Family Budget
A family budget is a plan for your household’s incoming and outgoing money over a certain period of time, such as a month or year. For example, you may aim for certain dollar amounts or percentages of your combined monthly income to go toward various expenses, like groceries, as well as saving, investing and paying off debt.
(a) That very small percentage of income is being spent on children’s education, religious and social functions, travelling, entertainment and luxuries,
(b) Expenditure on light and medical aid is negligible,
(c) 10% of the income is spent on dress and 6% on fuel,
(d) But the biggest item of expenditure is food which absorbs 60% of the income.
According to Engels’ Law of Consumption, it is a typical poor man’s budget in which about 3/5ths of the income is swallowed up by food alone and practically nothing is left for medical aid, education and for the satisfaction of educational and recreational needs of the members of the family.
Importance of Family Budgets:
Study of family budgets is of very great use from the economic point of view. That is why many economic organisations devote special attention to the study of family budgets. The economic and statistical organisation of a State Government in India makes a special study of family budgets of different classes of the people in the State.
To the householder, the study of this budget is very useful. He will be able to find out from the budget before him whether his income has been properly distributed among the various items of expenditure and also whether he has been able to balance his budget or not. If the house-holder is to derive maximum satisfaction from his limited income, then mapping out of expenditure beforehand is absolutely necessary.
To the economist, the legislator and the social reformer, the value of the study of family budgets is undoubtedly very great. They are able to form an idea of the standard of living of the people and the measure of economic welfare which is enjoyed by them. They are deeply interested in the economic welfare of the people, which very much depends on the way the income is spent.
A man may have a very large income, but, if it is not spent in a rational manner, he may not be able to derive maximum advantage from it. If the people waste most of their income on drinks and other harmful forms of consumption, then the economists and social reformers must sound a strong note of warning and call or urgent reforms. Another great utility of family budgets lies in this that they greatly help in determining the wages of labour and salaries of employees and in deciding about the dearness allowance claimed by them.
Thus, family budgets are a mirror of the consumption of a people. On consumption depends the standard of living, and the standard of living determines economic efficiency, which in its turn leads to economic prosperity. There is no doubt that the study of family budgets is very useful to the economist, to the householder, the social reformer and the State.
Engles’ Law of Family Expenditure:
Ernest Engels was a Prussian official. He studied a number of family budgets and arrived at certain conclusions. These conclusions have been given the name of Engels’ Law of Consumption.
They are:
- As income increases, the percentage expenditure on necessaries of life decreases, and vice versa.
- Percentage expenditure on luxuries and other cultural and recreational wants increases with an increase in income and decreases when income decreases.
- As for lodging or rent, fuel and light, percentage expenditure is generally the same for all incomes.
- Whatever the income, percentage outlay on clothing is practically the same.
It should be carefully noted that it is percentage increase or decrease in expenditure which is mentioned and not the total amount of expenditure. A rich man, certainly spends a larger sum on food and other necessaries of life but the percentage expenditure’ on hood, etc., is certainly less. This law was enunciated in Europe but it has got a universal application. It applies to India also. Family budgets have been studied in almost all States of India. All these studies amply bear our Engels’ conclusions.
The percentages of expenditure may slightly vary, but these conclusions broadly hold good. A very large percentage of the small incomes go into the purchase of the bare necessaries of life, whereas people with large incomes spend a small percentage of their income on such things. In the case of luxuries, the case is quite the opposite.
Business Budget
Budgets are an integral part of running any business efficiently and effectively.
Budget Development Process
The process begins by establishing assumptions for the upcoming budget period. These assumptions are related to projected sales trends, cost trends, and the overall economic outlook of the market, industry, or sector. Specific factors affecting potential expenses are addressed and monitored.
The budget is published in a packet that outlines the standards and procedures used to develop it, including the assumptions about the markets, key relationships with vendors that provide discounts, and explanations of how certain calculations were made.
The sales budget is often the first to be developed, as subsequent expense budgets cannot be established without knowing future cash flows. Budgets are developed for all the different subsidiaries, divisions, and departments within an organization. For a manufacturer, a separate budget is often developed for direct materials, labor, and overhead.
All budgets get rolled up into the master budget, which also includes budgeted financial statements, forecasts of cash inflows and outflows, and an overall financing plan. At a corporation, the top management reviews the budget and submits it for approval to the board of directors.
Static Vs. Flexible Budgets
There are two major types of budgets: static budgets and flexible budgets. A static budget remains unchanged over the life of the budget. Regardless of changes that occur during the budgeting period, all accounts and figures originally calculated remain the same.
A flexible budget has a relational value to certain variables. The dollar amounts listed on a flexible budget change based on sales levels, production levels, or other external economic factors.
Both types of budgets are useful for management. A static budget evaluates the effectiveness of the original budgeting process, while a flexible budget provides deeper insight into business operations.
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