Whether you call it a spending plan, a budget, or a forecast, you need to have one if you’re going to build wealth. I like the word forecast to describe the tool that I use predict my financial future. The three areas we’ll look at in this post are: what a forecast is, why it’s important to create a forecast, and why you should maintain a forecast.
What is a forecast? Creating a forecast is a lot like creating a budget. The components of a budget are actually a huge part of a forecast. In the forecasts that I like, I use Excel to create monthly budgets that are added together to create an annual budget. In your monthly budgets you will have costs such as housing, food, and insurance which are the expenses that you incur throughout the month. You will also have income from your job and investments. The accumulation of these monthly budgets allows you to predict or forecast how much money you will have saved at the end of the year or at the end of a period of time. Here is where a forecast is a little bit more than just a budget. The difference between a forecast and a budget is that a forecast also includes a prediction of your accumulated wealth that you’ve gained over time.
Why create a forecast? A forecast is a very import tool that can be used by anyone who has a goal of building wealth. Often, people are building wealth for many different reasons. Maybe you’re someone who is building wealth for your retirement. Maybe you’re someone who is building wealth for a child’s college fund. Or maybe you’re building wealth as a way to pay for a down payment on a car or a house. Regardless of the reason that you’re saving, creating a forecast will be a crucial tool that will help guide you financially every step of the way between now and where you want to go financially.
The third and final section of this post focuses on why it’s important to maintain your forecast. In life we experience many different financial changes. Maybe you lose your job. Maybe you get an unexpected raise. Maybe you have an unexpected expense such as a hospital bill. Change and uncertainty are a guaranteed part of life. As different parts of your life change so will your forecast. Maintaining your forecast will help keep you on track to reach your goals. For example, if you are some who is often tempted by a spontaneous purchase having a forecast will give you the excuse not to buy that thing that you think you need. Another example is when people receive a windfall of money, say a bonus from work, or an inheritance, they often see it as an excuse to go on a spending binge, but if you have a forecast in place and you’re regularly analyzing your investments you’ll be more inclined to put that money towards your financial goals.
All in all a forecast is comprised of many budgets that are added together to predict or forecast a future value that also takes into consideration your total wealth. Forecasting is a very important tool that can help you plan for your financial future and can help you stay on track to reach your financial goals.