By Amin Kef Sesay
The development of sound budgetary institutions in countries such as France, the U.K. and the U.S. has taken a very long time―200 years or more―and is still evolving.
What is Budgeting? Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.
It is an important planning and forecasting process to help you manage your money by balancing your expenses with your income. Thus, budgeting is simply balancing your expenses with your income. If they don’t balance and you spend more than you make, you will have a problem. Many people don’t realize that they spend more than they earn and slowly sink deeper into debt every year.
If you don’t have enough money to do everything you would like to do, you use this planning process to prioritize your spending and focus your money on the things that are most important to you.
Why is Budgeting so Important? Since budgeting allows you to create a spending plan for your money, it ensures that you will always have enough money for the things you need and the things that are important to you. Following a budget or spending plan will also keep you out of debt or help you work your way out of debt if you are currently in debt.
Once you create your budget, begin to use it and get a good feel for how it can keep your finances on track, you may want to map out your spending plan or budget for 6 months to a year down the road. By doing this, you can easily forecast which months your finances may be tight and which ones you’ll have extra money. You can then look for ways to even out the highs and lows in your finances so that things can be more manageable and pleasant.
Extending your budget out into the future also allows you to forecast how much money you will be able to save for important things like your vacation, a new vehicle, your first home or home renovations, an emergency savings account or your retirement.
Using a realistic budget to forecast your spending for the year can really help you with your long term financial planning. You can then make realistic assumptions about your annual income and expense and plan for long term financial goals like starting your own business, buying an investment or recreation property or retiring.
The same applies to the national budget planning process, which includes the currently fashionable emphasis on complex, multi-annual PFM reform strategies, strongly promoted by the donor community that advocates a simpler approach grounded on the important economic principle of “getting the basics right.”
What this government with the IMF is doing to get better value for money is strengthening budgetary institutions and public financial management (PFM).
This involves employing a stream of reforms that includes the latest techniques of fiscal rules, fiscal risk analysis, expenditure ceilings, medium-term fiscal frameworks, performance-related budgeting, accrual accounting and budgeting, and expenditure review.