Whether you’re planning for your household or for your business, budgeting can help keep your finances on track. A well-crafted budget not only helps you plan for expenses but also helps you set goals for paying debt and investing in retirement. One method of budgeting helps you plan for current-year costs by analyzing your previous-year income and expenditures. Called “traditional budgeting,” this method plans for unknown costs and income by looking at your known financial track record.
What Is Traditional Budgeting?
Instead of starting with a blank slate, traditional budgeting uses last year’s income and expenses as the benchmark for your current year’s income and expenses. You can look at your last year’s budget as a template of sorts, into which you enter your current-year financial data. Although you won’t have exactly the same amount of income and expenses as last year, traditional budgeting works on the premise that your budget from year to year looks pretty much the same, barring any overwhelming factor that enters the equation and skews your budget results.
Making a Traditional Budget
To set up your budgeting plan as a traditional budget, you’ll need to look at last year’s budget. If you didn’t have a formal budget in place for last year, you can still start a traditional budgeting plan by pulling your last-year’s financial data together. You may want to choose a spreadsheet program to make data entry and changes easier to input. But if your budget is fairly straightforward, you can also use a simple paper ledger and pencil for formatting.
Enter each line item of your budget from last year into your current-year budget; simply carry over the figures from last year. You’ll include your personal income (or business revenue, if it’s a business budget) and your personal expenses (or business costs). Now you’re ready to adjust the figures.
Tweaking a Traditional Budget
Review all your figures to ensure you’ve made accurate entries into this year’s budget data fields. Adjust your income amount, if you expect it to be higher or lower this year than last year.
If you underestimated your monthly expenses last year, adjust those figures to reflect more realistic amounts for the current year. You’ll have fixed expenses, such as your mortgage payment, and variable expenses, including personal items and business supplies. And you may also need to enter any new expenses that you’ll have this year, which you didn’t have last year.
After you tweak all the figures from last year that need adjusting, you'll have your current year's budget set up on paper (or spreadsheet) in traditional budgeting format.
Advantages of Traditional Budgeting
There are many types of budgets you can set up, each with its own set of advantages and disadvantages. After reviewing the different budget types, you'll be able to make informed decisions about which one works best for you.
Traditional budgeting brings these two primary advantages to the table:
- Easy to set up and implement. Many financial experts dub traditional budgeting as the simplest method of budgeting. You don’t have to be a financial planner with business analyst skills to carry over budget items from last year adjust them for the current year.
- Relies on actual data. There’s not a lot of speculation required to set up a traditional budget. You’re using the actual dollar figures from the previous year to project your income and expense budget entries for the current year.
Disadvantages of Traditional Budgeting
Critics of traditional budgeting point to the rigidity of its structure, particularly if the budget is for a business. Too many variables can change income and expenses, while the budget stays the same. And if the past-year budget is inaccurately prepared, these same inaccuracies will carry over to the following year.
Victoria Lee Blackstone was formerly with Freddie Mac’s mortgage acquisition department, where she funded multi-million-dollar loan pools for primary lending institutions, worked on a mortgage fraud task force and wrote the convertible ARM section of the company’s policies and procedures manual. Currently, Blackstone is a professional writer with expertise in the fields of mortgage, finance, budgeting and tax. She is the author of more than 2,000 published works for newspapers, magazines, online publications and individual clients.