The budget that worked for Mom and Dad might not be the best tool for plotting your financial goals now that you’re on your own. A traditional budget basically tells you how much money you have to spend and whether you can afford to save for something special or need to cut back your spending. A more comprehensive personal budget that addresses more than one scenario is your best bet to stay on track to meet your goals.
A traditional budget starts with a list of your income and expenses. After you subtract your expenses from your income, you adjust your spending levels and try to live on those budgeted goals for the rest of the year. Adding and recording items such as a retirement contribution or college tuition fund as savings helps you avoid overspending and meet long-term goals.
A traditional budget is static, telling you what you can spend based on best guesses made at the beginning of the year. A more progressive budget analyzes your monthly spending, compares it against your budgeted amounts and shows you where you will be at the end of the year if your income and spending levels continue at their current levels.
Lack of Flexibility
A traditional budget uses fixed amounts to plan for spending. This doesn’t take into account changes in your income. Using percentages to set certain spending levels helps you automatically cut back when you need to and contribute more to specific goals when you have the opportunity. For example, with a traditional budget, you might set aside $150 per month toward a college fund. With a more progressive budget, you can budget 5 percent of your excess income toward the fund; you automatically decrease this discretionary spending during months when cash is tight and contribute more during better months.
With a traditional budget document, you list income and expenses down one side and the months of the year across the top. At the end of the row of months, you add a “Budgeted” and a “Total” column. While this allows you to track your spending and see how you did at the end of the year, it doesn’t let you monitor your real-time performance. With a more progressive budget, you can add “Average Monthly,” “Budgeted Monthly” and “Projected Annual” columns. Each month, you can compare your actual spending to your budgeted monthly numbers to see if you need to make any adjustments to your annual plan. Keeping track of monthly spending lets you see what your numbers will be at the end of the year if you keep spending at the current rate.
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