A budget is a plan that shows a person’s financial objectives and plans of action. It is essentially a forecast of the incomes and expenditures. A budget helps an individual or organization to evaluate the performance of a business, share the available resources and eventually make plans for the current and future.
What can cause a budget deviation and their remedies
Budgets are essentially future forecast and within that period there could be occurrences that make budget compliance hard to achieve.
Some of those factors are an discussed below
Loss of job/employment
Since a substantial amount of income is derived for employment, therefore any loss of such employment can cause a serious budget deviation. It is not advisable that any person solely depends on employment as a source of income because employment is not permanent as it may appear to be.
Therefore to avoid such a scenario, one should have multiple streams of income e.g. holding more than one job and at the same time ensuring that any salary received is well spent and the rest is saved.
Performance of the economy
The profitability of companies largely depends on the performance of the economy i.e. a slump in the economy will lead to a decline in profitability of most companies. The salaries and dividends are paid out of profit generated from the operations and therefore a decline in operations result in to declining revenues which subsequently leads to lower dividends and salaries have to be re-negotiated downwards.
To avoid this, employees should ensure that they invest in different sectors of the economy so as to diversify and therefore safeguard their investments.
Emergencies like serious sickness that requires specialized treatment could severely strain any body’s budget plans. The budget should therefore provide for such emergencies and contingencies so as to avoid this by ensuring that one takes adequate medical insurance cover.
Rise in inflation rate
Inflation is the general increase in commodity prices. The effect of inflation is that it reduces the purchasing power of money and therefore one would require more money to purchase some quantity of goods. Increase in inflation leads to the increase in commodities prices. Commodities form a fairly significant portion of the budget in many households.
The effects of inflation can be reduced by ensuring that one has more disposable income to spend. Income can be increased by holding more than one job or through investments or having a business besides being employed.
Change in taxation rates
Various investment options carry various taxation rates. Some investments are high yield with high taxation rates while others are low yield with low taxation rates or no tax at all. The best investment objective that anyone can adopt is to invest for the future and thus benefit from capital appreciation. In the short run, one should invest in assets that yield high returns higher than the inflation rate so as the investment can appreciate in value.
The investor should ensure that the investments he is holding do not carry higher taxation rates while yielding minimal returns.
Ultimately, in order to achieve financial freedom and success, one has to adhere to the basic tenets of finance that “spend less than what you earn”. The result of this is that one is left with money to save and invest.
About, Inc 2008 Financial Planning, Budget Worksheet retrieved on 16/1/2008 from http://financialplan.about.com/cs/budgeting/l/blbudget.htm
Gilbert N 2006 Basic Frugal Budgeting Retrieved on 16/1/2008 from