Sat | Jul 24, 2021
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER

Oran Hall | Better decision-making, an advantage of budgeting

Published:Sunday | July 4, 2021 | 12:08 AM

Question: I read an article by you, published in the Sunday Gleaner of January 3, 2021m about budgeting, and I am compelled to ask you a question. My question is this: In relation to budgeting, is it safe to say that better decision making is an advantage? If you agree, please explain as I am very much aware that you offer personal-finance planning, advice, and counsel.

Budgeting is basic to effective financial management. As a spending plan, it lays out carefully how money is to be spent, thereby reducing the risk of chaos and improving the chances of goals being realised and in a structured way.

It is critical to financial well-being, which itself can contribute to better relationships, physical health, and mental health.

Budgeting is not just for people. It is critical to the functioning of organisations. I have seen the important role it has played in effective decision-making in organisations I have been associated with, as well as in the lives of people, not to mention my own personal experience.

A budget projects future income and expenses with the goal being to generate a positive cash flow. As such, it connects the future to the past and the present and requires the tracking of income and expenses to be able to keep on track and project the future.

By allocating amounts to particular purposes, grouping and capping them to a specific time period, budgeting helps to generate savings, which are critical to the realisation of goals. It may, however, be necessary to make adjustments to reflect new realities when they arise.

Considering that there are so many ways to spend and that advertising and peer pressure, for example, add to the urge to spend, budgeting introduces the element of accountability and requires strict discipline, self-control, and commitment.

Spending should be deliberate. I have observed from the communication coming to this column, for example, that many people spend without making a plan. The credit card has not helped as so many spend on a whim without any prior plan regarding how to repay the loan. This also holds true for other types of loans.

Budgeting helps in determining spending priorities: what to buy when, in what order, and within what price range. It may even determine what to forego to make it possible to realise certain goals in situations where money is limited.

Budgeting may also play a role in determining how much to save. As goals are set and the cost determined, a plan has to be put in place to determine how to fund the expense. Further, savings may have to increase, and the paring of some expenses may become necessary.

Better decision-making is a big advantage of budgeting when the spending plan is based on accurate income projections and includes income from all sources. It is also advantageous when the plan is realistic and when it is so structured that it is easy to identify spending patterns and allows for easy identification and analysis of variances.

A budget that facilitates good decision-making also has enough categories to show exactly where the money goes. Its headings should be clear. It is structured to show the natural inflow and outflow of money – monthly, for example – but covers a long enough period, such as one year, to allow for systematic planning.

A good budget helps to determine what is possible now or at a time in the future and makes allowance for emergencies and other unanticipated expenses. This last point is important for such expenses have the potential to derail even what may appear to be solid plans.

A credible budget helps to determine if goals are realistic and achievable and empowers people to make the decisions necessary to live within their means.

Budgeting does not guarantee that all will be perfect and blissful. There are many things over which we have little or no control, for example, price increases, sickness, unemployment, and natural disasters. Nevertheless, it can be a cushion against these unwelcome eventualities when it facilitates the creation of meaningful reserves.

As important as it is, a budget is hardly useful outside of a wider plan. The plans proposed and the goals set can only have meaning to the extent that the financial resources are available when needed and in the amounts required. The quality of the decisions made rests heavily on the quality of the budget.

- Oran A. Hall, the author of Understanding Investments and the principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email finviser.jm@gmail.com