What if I say that trees and leaves are the same thing? You would argue, and rightly so, that they are not. The leaves are a part of the tree but they are different.
The same difference holds true for financial planning and budgeting. A lot of people may think they are interchangeable but that is not the case. Budgeting is an exceptionally critical component of a financial strategy. It assesses how much you earn, evaluates how much you consume, and assists you in spending lesser than your income. On the other hand, financial planning, considers your existing financial condition and creates an extensive portfolio by forecasting prospective incomes, asset values and withdrawal plans based on your available financial data.
To understand what is budget, it is important to run the rule over financial planning and budgeting first and then find out how they differ. Here we understand the difference between a budget and a financial plan.
What is financial planning?
Financial planning prepares your financial future, helps you meet your life goals, and gives you financial independence. Effective financial management includes all aspects of your money, including your income, expenditure, investments, and taxes.
What is budgeting in business?
Budgeting tells you how much you can spend basic your monthly income. For an average household, a monthly budget consists of the expenses incurred on grocery, children’s education, utilities, lifestyle expenses, etc.
What is the difference between a budget and a financial plan?
Financial planning is a broad concept. Identifying your goals, saving your income and investing are a part of this. Budgeting is one part of the whole financial planning process. It represents a single step just like leaves represent one part of the tree.
- What they represent
Financial planning is based on your financial goals and helps you in achieving them. Budgeting, on the other hand, gives you an idea of your spending pattern and helps you in identifying unnecessary expenses.
A financial plan is devised to take care of your future needs. Budgeting, however, is a short-term concept. It is, generally, done on a monthly or an annual basis.
Financial planning determines the quantum of your investments. A budget is done to curb possible overspending. This is one reason why budgeting is part of a financial plan. Otherwise, you may never be able to save enough to fulfil goals.
To sum up
Though budgeting and financial planning seem similar, they are very different. Despite being different from each other, budgeting and financial planning are complementary to each other. Budgeting helps you save while financial planning uses the saved amount to invest in order to help you meet your financial goals.
How To Get Your Portfolio Up And Running
Every investor dreams of success. But, investing is not an easy art. There is no dearth of strategic portfolio management advice around promising instant success. But how does one sift through the clutter to get the right advice? Unfortunately, most individual investors fail to manage their investment portfolio on their own. With volatile markets and a glut of information, there is the danger of making a catastrophic move. To safeguard one’s portfolio and pre-empt risks, it is important to take the right kind of precautions. Here we understand what is strategic portfolio management.First things first, take controlIn spite of managing your own investment portfolio it is not bringing you the kind of returns you had in mind, or appears to be stuck, the primary thing to do is not to panic. Find out the cause and identify investments that are contributing to overall non-performance. Take requisite action on your portfolio, keeping in mind your long-term perspective. Do not let fear rule your decision making abilities. Clarity on the situation and a few portfolio management tips can help you decide when to hold them and when to sell.Let’s look into some investment strategies and portfolio management tips that can help you decide: Average down strategy Average down strategy aims to reduce your average cost in a stock. You buy additional units of stock that have slipped in price to average out the cost. Let’s take an example to understand this. For instance, you purchased 1,000 units of ABC stock at Rs. 50 per share. The price per share then drops down to Rs. 45. Now, if you buy additional 1,000 shares at Rs. 45, your average cost will come down to Rs. 47.5. Similarly, this strategy could also be applied to mutual funds to average out costs. This average down strategy strategy should be applied only if you have researched thoroughly on the company whose stock you hold, and convinced about its future potential, having implicit trust on the management and the company’s fundamentals. With a strong belief in the company’s fundamentals, you can continue to hold it for a long period of time by averaging down the cost. Sell the losers Fact-finding and doing necessary groundwork on the company is useful in ascertaining the company’s future potential. Get rid of the falling investments if the price has dropped and is not likely to recover. This strategy works well when the stock price has been on the wane and the company’s fortunes seem to be under threat. There is no point in holding on to a stock that is underperforming. Mistakes help you become wiser, and the investing process gets better with your learning. But, learning to avoid mistakes makes you a smarter investor. To be a successful investor, you need to have a clear methodology. Here are a few portfolio management tips to make your portfolio work for you: Draft a solid plan Formulate disciplined strategies Create a diverse mix Have a logical reason for every decision Periodically review and rebalance Do not let your greed and fear drive your investment moves To design, strategize, implement, manage and rebalance your portfolio rightly, you need to have the time, self-drive and most importantly extensive experience. The question is, would you be able to do it all by yourself? Do you have the requisite knowledge, competency and skillsets to manage your stock portfolio correctly?If you are hesitant to do it by yourself, there exists a tailor-made solution called portfolio management services that bring in expertise, knowledge and professionalism to achieve specified goals.ConclusionTo make your portfolio grow productively, follow an investing style that suits your risk profile, asset allocation, financial goal and time horizon. To avoid irrational decisions, conduct further study on your investment choices. A focused portfolio along with a disciplined approach is the key to success.
Indicators that show you need to start investing
Most people don’t think about when to start investing in the initial stages of their career. In fact, investing and saving for future is hardly a priority at that point. But the reality is that in investing, there is nothing like too soon. You can begin your investment journey with a very little amount as well. In fact, starting early gives your money more time to grow.To begin with investing, there is no better time than present! Here are few simple reasons for you to start taking charge of your finances; it can help you to know why to start investing. To give you an indication to start investing we list out some factors.Make up your mind to save as soon as you start earning!The perfect time to start investing is when you are young, healthy and independent. Here is why it makes sense to start investing early; here are key reasons how and when to start investing for future that can work wonders for you.- Long-term compoundingPower of compounding can do magic if you keep you invest for the long haul. Let’s take two different scenarios to understand this.✓ Scenario 1: Suman started an investment of Rs 5,000 per month at the age of 25. By the age of 60, his investment of Rs 21 lakh would fetch around Rs 1.9 crore, assuming the rate of return as 10% per annum. ✓ Scenario 2: Rahul started an investment of Rs 10,000 per month at the age of 35. By 60, his total investment of Rs 30 lakh can only fetch around Rs. 1.3 crore, assuming the rate of return as 10% per annum. Retirement corpus is lesser in the second scenario even if the invested amount is more! That’s just because investment was started ten years later. Such is the effect of time and compounding! Tips: Start investing in systematic investment plan from your very first salaryClarity on future goals indicates there is a need to investFormulate an investment strategy once you have recognised your financial goals. For example, you may want to set aside money for your marriage, which is 12 months down the line. Now that the end target is precise, you can start to fine tune the investments to reach that goal. You can similarly create long-term goals and invest accordingly. A well-calibrated investment strategy will help you realise your goal in the long term.There are some strong indicators that tell you to start investing. They are: 1. You have your financial goals penned down. This is the first step of financial planning. This is because you know how much money you need and when. It also means that you are “investment ready”.2. You have paid off your outstanding loans and still have some cash in hand. This will help you build your investment kitty.3. When investments aren’t meant to merely save taxes. Here are a few investment strategies for beginners:✓ Start today! There is nothing called the right time. The sooner you start, the better for you. Waiting for the better job and better salary will only make you miss the opportunity.✓ Take help of advisors. You can make a better choice with their help. ✓ Know the products that you are investing in. Understanding the product helps you make an informed decision.✓ Start with simple options in the beginning. Start by investing in options like mutual funds and then proceed to other asset classes like equity.✓ Monitor and review your investments.✓ Increase investment amount with time. ✓ Create emergency fund. Try to keep at least six months’ worth salary in this fund. ConclusionStarting early is the key to success. So, take charge of your financial future and get started as soon as possible. Keep reviewing your investments regularly and track their growth. This will help you reach your goals successfully.
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