Final answer:
When choosing the period of a budget, it's crucial to align it with the frequency of your income, like a paycheck. This ensures you can cover expenses and save properly during that period. The challenge of budgeting arises from making intertemporal choices and understanding low saving rates.
Step-by-step explanation:
The most significant factor when choosing the period of a budget is aligning it with the regular financial cycle that impacts your income and expenses. Typically, this involves looking at events such as the receipt of a paycheck, which has a specific period and frequency. For most people, this will be on a monthly or biweekly basis, coinciding with when they receive their income. When constructing a budget, the goal is to ensure sufficient funds are available during the budget period to cover anticipated expenses and factor in savings objectives.
Creating a budget facilitates the tracking of cash flow, identifying wasteful expenses, and helps in reaching financial goals. However, making intertemporal choices and interpreting intertemporal budget constraints can be challenging as they require forethought and prioritization over both short and long-term time horizons. It is essential to understand why saving rates, particularly in America, tend to be low, which could be due to prioritizing immediate satisfaction over future financial security.