Budgeting vs. Forecasting: A Clear Distinction for Financial Planning

Budgeting and forecasting are two pieces of financial planning that are connected but not interchangeable. Budgeting is a way of assuring your expenses in a given month or year do not exceed your income. Forecasting, on the other hand, is a way of predicting which expenses you may be able to afford if your income expands in a given term.

Budgeting Expenses

You likely have a certain income you can guarantee in the coming month. Whether this is the income your small business will earn from clients on retainer or the income you personally take home in your paycheck, there is a given amount of money you know you will have at the end of the day. Budgeting is assuring your expenses do not exceed this sum.

Forecasting Expenses

In addition to your anticipated income, you may increase your income due to new sales or bonuses. If this occurs, you can potentially increase your expenses to purchase new equipment or even buy a luxury item. You should forecast as a way of setting goals and giving yourself expected rewards for these goals. However, even if you forecast a large increase in income, you should not spend money in excess of your budget until the income comes in the door.