Monday, 4 February 2013

Budgeting - Are you top-down or bottom-up?

I was re-reading an article from MoneySense, one of my favourites (link below) and they were talking about budgeting and the two main approaches - Top-down and Bottom-up.  Top-down is where you  set a budget and follow it.  This is the one most talked about where you collect all your receipts to figure out where you are spending your money, set a budget amount for all the spending categories and then track every expenditure.  If you're a very detail-oriented person, this works for you.

The one that's not talked about so much is the Bottom-up approach.  With this approach, you decide in advance how much you want to save in advance and put it aside before spending on other things.  The article gives a saving target as an example but you could extend this idea for other things.  Let me give you an example.  When I was in university, I had 4 different room mates over my time in school and we shared the grocery expenses but didn't really know who would be doing groceries so came up with a simple solution.  At the beginning of each week, each of us put a agreed amount of cash in a cookie tin and whoever was going to the grocery store used the cash and put the receipt and change back in the can.

After university, when my wife and I had more financial responsibilities (e.g. house, car, insurance), we used this same idea.  The cookie tin became a separate bank account and the cash in the tin became transfers from our accounts right after our pay cheques were deposited for all these regular expenses.  What was left in our banks accounts after the transfers could be spent on other, more discretionary things.

Try talking with your kids or students about how you budget and what works well/not well for you.  It might require a bit of experimentation but bottom line is everyone has to decide what works for them.

James Whelan,

Link: How to Save More, Summer 2012,

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