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Why is Budgeting and Tax Planning shown as the first component of a financial plan? Budgeting...

Why is Budgeting and Tax Planning shown as the first component of a financial plan? Budgeting and tax planning form the foundation for other components of the financial plan. Retirement and estate planning only apply to those in later life stages. Almost every financial decision has a tax impact that must be taken into consideration. Lack of budgetary control will prevent the ability to save, acquire assets and pay expenses. Investment cannot occur without the ability to save. A primary financial objective should be to minimize one’s tax bill. I, II, III and IV I, III, IV and V II, IV, V and VI I, II, V and VI

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Expert Solution

Budgeting and tax planning:

Budgeting is the process of forecasting the future expenses and income of an organization.

A budget is necessary for the individual / an organization to plan for the spending and saving to meet the current needs as well as future contingencies. Budgeting helps in making a balance between money available on hand and how much money is owed to others. His will help the individual in knowing his current financial position.

A key factor in shaping the budget is to ultimately know our income. Having income will help the individual to save money, have adequate assets in its balance sheet etc.

Having adequate savings will enable the individual to make investments on various options like insurance, opening bank accounts, buying gold, investing in properties etc.

Tax planning:

A tax on other hand is estimating how much money is owed by the business to the government. The more the profits the company makes, the more is the tax paid.

Hence it is necessary to make tax planning to reduce tax liability. Tax planning doesn’t mean tax evasion. Anyone would like to reduce their tax burden whether individual or business. Savings using a retirement plan or contributing money to traditional IRA can minimize the gross income. Other means of investments that help in reducing tax liability can include paying insurance premiums, HRA, contribution to any charities etc.


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