Budgeting vs Financial Planning - What's the Difference?

NEW YORK, November 23, 2021 (Newswire.com) - Northwestern Mutual: Budgeting and financial planning are both critical elements to a healthy financial life. But despite their differences, many people use the terms interchangeably. 

What's the difference between budgeting and financial planning? Here are some key ways in which budgets and financial plans are different. 

Short-Term vs. Long-Term Planning 

Budgeting is a small facet of financial planning that focuses on the short term by giving insight into and control over money. And abiding by a budget often sets people on the right path for short-term financial success. A well-thought-out budget can also help prioritize spending, which can help people make sure their money is going to what's important to them — now and in the future.

Financial planning is larger in scope and consists of all aspects of personal finance, including saving, spending, investing, and more. Financial plans are typically created and then revisited annually, whereas budgets are often done monthly. That's because financial planning is focused on the larger financial picture, which may not change as frequently as expenses do month-to-month. 

Granularity vs. Broader View 

People use budgets to manage daily spending. And they get much more granular than financial plans. A great budget will break down spending into categories and potentially sub-categories. For example, someone's budget may allocate $500 to the monthly food category. But within that category, $300 goes toward groceries, $100 to dine-in restaurants, and $100 on fast food. This allows people to get specific in the areas they want to spend and plan accordingly for days they'll eat out vs. staying home. 

A budget shows where money is coming and going on a daily or monthly basis. A financial plan, on the other hand, is a broader look at progress on long-term financial goals, as well as a plan for how to cover the cost of something unexpected. 

Daily Expenses vs. Financial Goals 

A budget is a reflection of daily spending decisions. But a great financial plan focuses on larger financial goals. A comprehensive financial plan will focus on areas like: 

• Accumulating wealth and passing it on: Considers investments, estate and tax planning,  and even whole life insurance, which offers financial protection, will accumulate funds that can be accessed during one's lifetime and can eventually help leave a legacy. 
• Protecting from life's curve balls: Consists of financial safety nets like term life insurance and a solid emergency fund to secure your plan if something unexpected happens 
• Debt management: How to effectively pay off existing debt and avoid taking on bad debt in the future 

Are a Budget and a Financial Plan Both Necessary? 

A budget can be used as a building block of the larger financial plan. That's because getting a grasp on cash flow and understanding income and expenses helps lay the foundation for how the money will be spent. But a budget alone isn't sufficient to cover financial planning. 

That's why it's necessary to have both a budget and a financial plan.  

The Bottom Line 

Budgeting and financial planning are both critical components of a solid financial future. But budgeting is focused on managing day-to-day spending while financial planning takes a broader look at one's financial picture and plans for  life goals. And both budgets and financial plans are critical to long-term financial success. 

Source: Northwestern Mutual