Over the years, businesses have devised various strategies to help with their budgeting processes. However, do you know that you can apply some of these strategies to your own personal finance as well? Today, I’d like to take you through some of these methods for your personal finance budget. See if you can try at least one or two yourself.
Zero-based budgeting is a budgeting method in which all functions within an organization start with a “zero-base”. All expenses, including the recurring ones, like rent and electricity, must be justified for the upcoming period. This is in contrast with incremental budgeting. With incremental budgeting, you build your budget for the current period based on a baseline. The typical baseline is budget from last year.
- You start with a clean slate.
- It allows you to conduct a thorough review of your personal finance
- Any prior years abnormalities, such as one-time maintenance expenses, are not carried forward.
- This can prevent you from setting up a budget that doesn’t tie to your current reality
- It forces you to scrutinize all spending categories while minimizing bias.
- Without a baseline that reflects historical patterns, you are more likely to base your budget on where your money should go.
Of course, a zero-based budgeting process can be quite time-consuming, because you have to go through every single category. Since it is a big task, I recommend that you take a Saturday afternoon and do it while having a cup of your favourite drink. You may even set up a small reward for yourself at the end of the session, just to have something to look forward to.
Line-item budget is, first of all, a presentation of budget in which all spending categories are broken out line by line. Additionally, once you set the budget for each line item, any savings from one line item cannot be transferred to another.
- Similar to zero-based budgeting, a line-item budget can help you set up a comprehensive personal budget. It forces you to break down your spending categories one by one and go through each one carefully.
- Because of the stipulation that you cannot transfer money from one line item to the other, it can help you save money throughout the year.
- For example, say if you budgeted $150 per month for entertainment. However, because you scored a pair of free tickets by winning an online contest, your actual entertainment spending dropped down to only $50. Because you can’t transfer the $100 to another spending category (e.g., clothing), you are effectively saving $100 extra during the month.
Line-item budget can be a very strict form of controlling your budget. Of course, since it is personal finance, you want to make sure that it works for you. If you find it too difficult to have absolutely no transfer between line items, you may want to relax the rule a little. The proper term for such a strategy is a “hybrid form”, meaning that you allow yourself some room (say 5% of the budget in a category) to be transferrable.
Additionally, having too many line-items may also add too much complexity. I recommend that you stick to just a few main ones, such as rent, utilities, groceries, medical expenses, grooming and entertainment. You may also consider expanding these categories a bit further. For example, you can split your entertainment category into dining out and events. But there isn’t really a need to further divide “dining out” into “brunch-on-Sunday” and “weekday dining”. Unless, of course, there is a sub-category that you want to focus your energy on.
Companies normally have a one-year planning cycle. In the beginning of the cycle, the budgeting committee members work together to develop a one-year plan for the company. You should really have a one-year plan for your personal finance as well. It is basically a New Year resolution specifically for your personal finance life.
Tasha from One Big Happy Life is a huge proponent of the one-year budget. I am a strong advocate for this practice as well, because I do believe that having a one-year budget can really help you anticipate and plan for your big purchases. It may also be simpler than a typical month-to-month budget, since you finish the budget all at once.
If you would like to learn more about the ins and outs of a one-year budget and how you can start one, I recommend that you check out this post by Tasha.
Monthly performance reviews
Companies regularly conduct monthly performance reviews as part of their operational monitoring process. Typically, these reviews are done in the first or second week of the month to review prior month’s performance. These sessions help companies understand what their actual results are compared to the budget, the prior year’s results, and external standards if data is available.
Similarly, you can conduct your own monthly performance reviews for your personal finances. By reviewing your finance on a monthly basis, you can understand what your spending habits are like in the prior month, and how they compared to your budget or your prior year’s spending. They can also be a time for self-reflection, not just on your spending habits, but also on all the experiences that you accumulated in the prior month.
Mid-year deep dive
Companies typically host a mid-year deep dive every 6 months. In my company, the mid-year deep dive usually occurs around June or July. Compared to the monthly performance reviews, the mid-year deep dive a more in-depth look into the performance of the company. While big-picture strategies (those at least in the 3-5 year range) typically don’t change, some shorter-term strategic changes may emerge from the mid-year deep dive.
When it comes to personal finance, a mid-year deep dive is a place where you can conduct a more comprehensive review of your finances. For example, you can review your investment allocation and your budget as a whole. Mid-year is a sweet spot. It has been six months so you have a good amount of data on hand, but there is still six months to go for you to make some impactful changes to your financial life.
These five business budgeting strategies and concepts can be useful tools for managing your personal finance. Whether you are working on your personal finance alone, as a couple, or as a family, I recommend that you give them a try. If you’d like, leave a comment down below to let me and other readers know if you find them helpful!
If you are interested in using a budgeting app to help manage your budget, my friends John and Sam over at How to FIRE has a great article on YNAB vs Mint, two popular budgeting apps.
To read more on money saving tips and tricks, check out my articles here!
Bella Wanana is a freelance writer. She is the owner of bellawanana.com, a personal finance and lifestyle blog. She loves sharing with her readers the best tips and tricks on personal finance and how to live a balanced but fulfilling life. She has been featured on sites like MSN.com, Reader’s Digest, The Financial Diet, Yahoo Finance, and GOBankingRates.