We're always looking out for new ways to save money. Many of us are looking for ways to manage our finances but it's just always that easy. Different budgeting techniques work for various different people. What might be spot on for some families might be simply the wrong way to approach things for another. In this blog post we're going to look at a different type of budgeting, one you may not have heard of before. It's called incremental budgeting.
What Is Incremental Budgeting?
Incremental budgeting might be more commonly used in business, rather than personal finance. However the idea can make just as much of an impact on your money. Incremental budgeting is when you make minor changes to your existing budget to create a new budget. Your current budget acts as a base or template for your next budget. In business, this would be you looking at what your budget was in one tax year, looking at how much was spent and any specific circumstances. This would help you figure out the budget for the upcoming year. In terms of your personal finances, you can set weekly budget, monthly budgets or annual ones. It might sound more complicated than it actually is. You're basically using a previous budget as a starting point for your next budget.
How Does Incremental Budgeting Work?
This approach to budgeting is all about making little changes to your current budget to crate your new one. Using the previous period to create your new budget helps you realise what has actually been spent. It doesn't take into account different circumstances and fluctuations but it does help you create a ballpark budget figure. You'd look at the previous year and note down everything that was spent.
There will be many things that will be recurring payments from last year to this – insurance, rent, wages. However there will be other things which are out of that, such as a refit that took place last year probably won't take place this year. Updating computer software last year could have been a massive expense which you wont be doing again this year. Of course, there might be things that you need to do this year which weren't included in last years budget. It's a common practise and quite a practical approach to finances for a lot of business people. Whilst it is perhaps more common in organisations, the idea can still be used personally.
When looking at incremental budgeting for personal finances it might just be about the month to month food shopping. Many of us struggle with keeping on top of our personal finances but sticking to a budget based on what you've actually bought during the month will help you stick to the budget and keep an eye on your cash. Weekly might not work for you as you don't necessarily buy the same things every week and you might have one off purchases once a month. Using what you've actually spent will help you realise you've got to stick within.
Potential Problems
One problem that can crop up is spending cash because it's budgeted. Just because the budget is there, in business, it can often be spent. This can happen because of a ‘use it or lose it' mindset from managers. If a department has cash allocated, they don't want it taking away. So even though using last years budget to help with this years, it can lead to spending for spending sake. The money could be reallocated or even saved for a future emergency or project.
Instead, it is spent to ensure the budget is there for the following year too. There are no incentives to reduce costs because the numbers are based on spending, not saving. Using last year's budget with a couple of minor adjustments can be seen as being inflexible. In a fast paced and ever changing business world, our budgets could also be able to adapt and change.
For use in your personal finances, you might be able to put a monthly budget on a spreadsheet based on what you have spent. However it's exactly that, what you have spent. It's not looking at saving. Incremental budgeting can be a great way to get all your ducks in a row, as it were. It shows you what you could spend but not necessarily what you should spend. The idea is great in practical terms but if you are wanting to save, incremental budgeting isn't for you.
Incremental budgeting is perfect for businesses who want to ensure there is money available for everything they are likely going to have to pay for. The same using it as a technique in personal finances. However if you want to cut back and start saving, it might not be the best thing for you.