Question

Which of the following is the most important consideration when planning your budget?

Answer 1

Option (A) is correct. The budget for your needs before your wants is the most important consideration when planning your budget.

Further explanation:

Budgeting:

Budgeting refers to the estimation of the upcoming inflows and outflows for a specific activity. The budget is prepared to estimate the future financial activities so that the management of a company can estimate the funds required for the future activities. It would help the ideal capital allocation. An accurate budget leads to decrease in the business risk.

Considerable factors in the preparation of the budget:

The most important factor in the preparation of the budget is to plan the future requirement.  

The budget the estimation of the future business activities. Therefore, the management of the company should consider first estimate the future activities so that the cash inflows and cash outflows can be ascertained effectively.

Thus, the option (A) is correct. The budget for your needs before your wants is the most important consideration when planning your budget.

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Answer details  

Grade: Senior School

Subject: Cost accounting

Chapter: Budgeting

Keywords: Which, following, most, important, consideration, planning, budget.

Answer 2

The most important consideration when planning your budget is allocating the budget for fixed expenses before flexible expenses.

Further Explanation

Fixed expenses are the cost that do not change for a period of time. These include rent or mortgage payment, car payment, dues and subscription.

Flexible expenses are the cost that typically fluctuate. It can be changed, reduced, or eliminated. These include groceries and entertainment costs.  

Since flexible expenses can be changed or reduced, allocating the fixed expenses can lead to the safe side of not living beyond your means.

However, before you allocate your flexible expenses, you have to identify these costs. According to a certified financial planner (CFP) a person may need to review 6 months past their financial statements to know the average of their food-related cost if they fluctuate significantly. It is possible that some people are budgeting fixed amount for food but actually spending more after taking into account the restaurant bills or the food delivery bill for lunch and dinner. Keeping a diary of the expenses you pay with cash, such as restaurant bills and grocery purchases, can help you accurately track what you spend over a given period. Once you know your average, you can budget accordingly.

Needs vs. Wants

Flexible expenses like food and gasoline are needs. Eliminating the less important costs from your budget such as maid services can improve your cash flow.

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Keywords: budget, expenses, flexible expenses, fixed expenses