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.
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.