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What is a statistical budget? A statistical budget is a tool sometimes used by firms who want to be able to model different financial scenarios based on differing variables. Suppose that you were working on an annual budget for a trucking company. One huge variable that might affect your numbers wildly is the fluctuations in the price of diesel fuel. You could create a budget that allowed this value to be represented by a factor of current costs. Then, simply by changing that factor, you could see what effect a major increase or decrease might have on your business. The same could be said for licensing fees or road taxes that have to be paid. In addition, you could model changes in contracts – what if business increases next year? Well, obviously more contracts equal higher revenues but also increases the costs of fulfilling those contracts. A statistical budget can incorporate these changes and quickly let you see how a change in one or more variables will affect your financial situation over the course of the coming year. These budgets can be as simple or as complex as those creating them choose to make them. But can they help you in your personal financial planning assumptions? Of course I don’t think the average household needs as complex a budget as a logistics company, but I do think that allowances should be made for changing variables. Which variables should be considered by the average household? I think the big ones are inflation and household income. Imagine if inflation were to double next year. How would that affect your household budget? A simple statistical budget would allow you to quickly see the effect of that type of change. I recommend using a spreadsheet program that would allow you to simply change an inflation factor that would be reflected in the dollar values of your expenses. The same could be done for household income. Is your income going to remain steady throughout the year? What if it were to change? A monthly income factor could allow you to model changes throughout the year if you were expecting income to fluctuate due to seasonal changes or increased/decreased workflow. Most people managing their personal finances will not need to make their budgets overly complicated in order to construct a statistical budget to meet their needs, but the benefits of doing so are clear. Since various “what-if” scenarios are easy to simulate the statistical budget gives you a way to quickly model changes to your financial environment that you couldn’t do otherwise.

Q: The Statistical Budget

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