Pros And Cons Of A Budget For An Individual

2019/02/25

A budget is prepared to estimate total income or total expenses which are expected to be incurred by an individual during the period for which the budget is developed. Let Us Discuss The Advantages and Disadvantages Associated With A Budget.

Advantages Of A Budget For An Individual

a) Basis for Comparison and Corrective Action:

By preparing a budget, an individual can make a comparison of actual versus estimated income and expenses. This comparison can help the individual to identify the areas where he/she needs to control costs. In the absence of a budget, it will be difficult for the individual to take appropriate corrective action to control unnecessary expenditures.

b) Basis for Savings And Investment:

A well established budget helps in estimating the total amount of savings which may be used for investment purposes by an individual.At the beginning of every month, an individual can identify the amount of money that may be available at the end of the month.

This information can help the individual to properly plan his/her investments and earn extra income in the form of interest, dividends and so on. Surplus funds can also be invested in tax saving instruments which may help in reducing the tax liability of the individual.

c) Basis For Arrangement Of Funds:

By preparing a budget, an individual can estimate the total amount of expenses that he/she will have to pay in the near future. In case the estimated amount of total income is not sufficient to pay estimated expenses, an individual can use other means of obtaining funds such as borrowing money from a friend for a short period of time.

Disadvantages Of A Budget For An Individual:

a) Budget Is An Estimate:

Even though an individual may have considered all possible expenses and incomes, a budget is only an estimate. There can be a scenario where the actual expenses may turn out to be higher than the estimated expenses.

Similarly there can be a situation where a particular income expected to be received in a month is not actually received by the individual. All these differences can create problems for the individual in case sufficient money is not available to pay for actual expenses. Such kind of deficiency can also affect the investment plans of the individual.

b) Based On Past Information:

An individual may estimate total income and expenses on the basis of figures for last few months. As a result, factors such as receipt of interest income from bank may be ignored by the individual while preparing the budget.

Similarly it will not be possible for the individual to estimate the total amount of money that may have to be incurred on medical treatment for any family member. All such factors can disrupt the initial calculations made by the individual at the time of preparation of budget.

For Instance, an individual may have estimated an amount of $ 500 towards petrol expenses for the month of August 2011. However, due to increase in petrol prices, a total amount of $ 575 was incurred by the individual. It is important to note that this increase in petrol prices could not have been predicted by the individual at the time of preparing the budget.

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