Today’s world is characterized by uncertainty in almost all facets of life, but the most significant and far reaching is financial uncertainly. This is because financial decisions that are made today have a direct impact on our tomorrow’s financial position. Financial planners and coaches have come in handy in offering financial literacy literature, most of which is centered on fast ways of making and sustaining wealth. A quick look into this financial literature will however provide glaring evidence of these authors inability to assist the target audience on how to manage the money once they have earned it. This is critical considering that there are several issues that will come to play when deciding what decisions to be made, especially regarding finances which brings us to the issue of a budget.
Budgets are very simple financial projections that show ones expected or actual cash inflows vis a vis actual or projected cash outflows. Many people, even in their personal lives are unable to make or stick to budgets, since its actually not very easy to stick to a budget especially with the temptation that comes with impulse buying, as well as cost overruns. This paper will attempt to explain how a budget is helpful, and methods of making and sticking to a budget, a key financial problem in modern times.
In order to illustrate this point, we shall assume that I have secured a job immediately after graduation, and am trying to come up with a budget on how I am to live within my means, as well as be able to save a bit of my earnings so as to be able to acquire some assets after leaving college. The prospective first job is that of an assistant accountant in a leading multinational that is involved in the manufacture and distribution of homecare products. The salary awarded for this position is say, $ 18000 per annum.
For this starting position, I will first and foremost expect a lot of support from other senior accountants. Some of my duties, however will include, bank reconciliations on a monthly basis, keying in financial information in the system, assisting the other finance people on the areas that they could be of help, preparation of monthly management reports, production and processing of final books of accounts, which include the profits and loss accounts, accruals and prepayments, supporting audit exercises, annual budget preparation as well as preparation of VAT returns.
In five to ten years time, I will expect to have learnt so much as pertains to Accounting and generally the profession that I will be in a position to make more crucial accounting and finance decisions in the capacity of a finance manager or finance controller. This is because looking at my aptitude as well as attitude towards work I will convince the management that I am the right person to take any senior position in finance during this period. For the purpose of this assignment though, we would take that the budget is done at the onset of my first job, where the annual salary is not more than $ 18,000.The budget would look as shown below
Income/salary per annum Monthly income/salary
$18,000 $1500
Expenses
Rent -$6,000 -$500
Transport and local travel - $ 2,400 -$ 200
Entertainment -$1,800 -$ 15
Utilities -$ 1,000 -$ 83.3
Meals -$ 4,500 -$375
Suplus as per the year $2,300 326.7
Tax 20% 20%
Net surplus for the year $ 1840 $ 261.36
The above budget shows the annual earnings as well as a monthly earnings summary. Starting with an income of $ 18,000 which is rather constant at the year, the budget goes ahead and further breaks down the expenses into manageable items. Rent is $6,000, travel and transport am looking at $2400 while entertainment, utilities are amounting to $15,700 and therefore a surplus of $2,300 while the same translates the same to $326.70 monthly surplus earnings net of all expenses. This amount is however subjected to 20% tax and thus the figures are now different.
A 20% tax imposed on our figures above reveal that they shall be lower than the surplus, since the net long-term impact for tax is to reduce the earning capacity of the employee, and therefore this tax has significantly reduced the earnings margin.
Conclusion
In order to wrap up this issue as discussed, a budget is a very critical management tools and should be employed in almost all financial decisions. The expected financial inflows must always be matched with the financial outflows and in so doing; the quick financial decisions can be made as soon as possible. There are several types of budgets that exist but for the purpose of this study, only on a simple budget have been used to illustrate the position. While people have been criticized for not being able to make sound budgets and also being unable to manage and keep them, proper financial planning by the use of budgets is critical in ensuring that financial independence is achievable.
Work cited:
David Barr Chilton. The Wealthy Barber, 3rd Edition, Prima Publishing, Roseville, California, 1998
Sheryl Garrett. Personal Finance Workbook for Dummies, by ISBN: 978-0-470-09933-9.
John Wiley & Sons, Inc. 2007
Deborah Taylor-Hough. Frugal Living for Dummies, 2003, ISBN: 0764554034, by John Wiley & Sons,2003
