What is the Difference Between Financial Planning and Budgeting?

While both financial planning and budgeting are important tools in creating a stable financial situation for an individual, household, or a business, each function provides specific benefits. Essentially, budgeting makes it possible to handle day-to-day costs and expenses in a manner that keeps the operation moving forward. Financial planning makes it possible to have a destination or goal for that movement, which in turn enhances the work of the budget.

One way to understand the different between financial planning and budgeting is to perceive the planning as the identification of a goal, while the budgeting is the tool used to make the realization of that goal possible. For example, if the goal is to set aside funds for a child’s college education, financial planning will go through the process of determining how much money must be set aside in order to fund four years at the institution of choice. Once the goal is clear, it is possible to look at the available revenue stream and determine how much money must be set aside each pay period in order to save the desired amount of money. That amount is included as a line item in the household budget and if faithfully set aside each pay period will result in having the funds on hand when the child embarks on his or her college career.

This same general approach to financial planning and budgeting can be used for short-term as well as long-term financial projects. A goal such as buying a new household appliance will involve researching the purchase and identifying the exact model that is desired, and the total purchase price of that particular model. From there, the family budget is evaluated and funds are diverted toward making the purchase, either by allocating funds to pay off the credit card debt incurred to buy the appliance or by setting aside money for specific number of pay periods to purchase the appliance outright. With both approaches, setting goals, planning a way to achieve those goals, and then budgeting so that the goals are realized is a logical sequence that can work in just about any situation.

It is important to note that in order for this sequence of financial planning and budgeting to work, an adequate amount of income must be available to create a workable budget. Cash flow management is important to setting any type of financial goals, whether those goals are associated with retirement planning, estate planning, or tax planning. Without adequate cash flow, it is impossible to create a workable budget and eventually reach the desired goals. For this reason, it is sometimes necessary to adjust the financial planning to accommodate the current level of income and set reasonable expectations and time frames for achieving the desired goals. Keep in mind that as incomes increases, it is always possible to reevaluate the financial planning and budgeting, and adjust the line item allocations to hasten achievement of the stated goals.