Three Types of Budgets

Whenever someone is working on a financial goal, one of the topics that comes up is working with or within a budget. The fact is that there are three distinct types of budgets, each with their own structure and approach. This subject is definitely not a “one size fits all” topic. Understanding the different types of budgets will help you track the right information for the task you are working on.

Operational Budget

Most of the time when someone is talking about their budget, they are referring to an operational budget. An operational budget is one that tracks ongoing financial activity. This the day-to-day budget of a business or a family.

An operational budget tracks both income and expenses. The purpose of this document is two-fold. First, by tracking all financial movement, or “cash flow”, a person can get a much clearer picture of the financial situation. Hopefully, this picture will allow a person to make any desired changes in an efficient manner. Second, the focus of this budget is on the difference between income and expenses. In a business, this is the profit; for a family, this is the “fun” money. What to do with this difference is another topic, for another time.

Project Budget

A project budget focuses on controlling expenses. The idea is there is a certain fixed amount of money available to pay for everything. By tracking expenses, a person can make sure that everything will be covered. When a person delivers a result “on budget”, this is the type of budget being discussed.

The key is to track expenses, enabling decisions to be made correctly. Questions about buying resources, hiring people, purchasing advertising are typically discussed in this context. Income is typically fixed at the beginning of the project or available in clearly defined amounts. Often, a project budget references an operational budget.

Goal Budget

A goal budget is where a target amount of money is set and the amount of income is tracked. If expenses are tracked, they are done so only as an impact on the income. For example, a fund-raising project is handled this way.

Any expenses tracked in this budget are simply expenses directly related to getting income. For example, a fund-raiser may purchase envelopes to distribute so that people can mail in donations. The primary focus is the rate of growth of the amount saved. Again, this effort can be related to other, more comprehensive activities, such as a family saving for a vacation as part of their overall budget.

Having the Right Structure

When a person is creating a budget, having the right focus is a critical element of success. Understanding the different kinds of budgets can really help setting the emphasis correctly.

Household Budget Basics

If you have recently graduated from high school or college and are entering the workforce, establishing credit and developing a sensible household budget is the foundation to your future success. Creating and sticking to a budget based on your current income with a commitment to spend within your means is the first step to creating long-term financial success. The following suggestions will help you develop your budget.

• Monthly Income – Depending if you are a salaried employee, paid hourly, or receive tips and commission income you will need to determine your average monthly income. If you receive 1099, tip, or commission income, you should gather your most recent pay stubs and last year’s tax return to calculate what you typically earn on average each month after taxes. You should also consider: child support, alimony, disability, or cash income that you receive as part of your monthly income. Once you’ve added up all the sources of your typical monthly income you now know what your expenses can be.

• Monthly Expenses – Look at your checkbook and your most recent bank statements to determine what you are spending your money on each month. Start with your fixed expenses, such as: rent, utilities, automobile payment, insurance, student loans, and credit card debt. Then, write down what you have been spending towards: food, entertainment, and other varying expenses. Once you have determined your average monthly income and expenses, it is now time to see how you can reduce your spending.

• Lowering and Eliminating Monthly Expenses – If you have a significant amount of credit card debt, you may want to consider a consolidation loan or if you are already a homeowner, a home equity loan to reduce your monthly payments. This may also allow you to significantly reduce the amount of interest you are paying annually. Other ways to save include: eating at home more often to reduce the amount of money you spend on food each month, turning the temperature on your thermostat down a few degrees and using the air conditioner less in the summer, turning the lights and electronic devices off when you are not using them, writing a list of what you intend to buy before you go to a grocery store or department store, and use coupons and buy generic whenever possible. These are just a few ways reduce your impulse buying and lower your monthly expenses. After keeping track of your spending habits over a few months, you can then see what you are spending your money on and how to eliminate unnecessary expenses and impulsive purchases.

There are countless ways to lower your monthly expenses and save money. Implementing just a few of these cost-saving ideas will help you decrease your spending and save faster than you may have thought possible. Now that you have created a monthly budget, open a saving account and deposit $25 per week into the account. Use your savings to avoid future debt, only use it for special purchases, holiday spending, or unexpected expenses. If you are renting your first apartment and have never had to pay utilities or purchase your own groceries, sticking to your budget will require discipline and commitment. For long-term success and financial stability, it is in your best interest to live within your means and stay out of debt.