Budgeting is an essential part of financial planning and management. It helps companies and individuals to plan their finances and allocate resources in the most efficient way. There are seven main types of budgeting used by companies: the strategic plan budget, the cash budget, the master budget, the labor budget, the capital budget, the financial budget, and the operating budget. Depending on the people involved, the systems available, and the flexibility to plan and propose the budget, organizations can use a top-down or bottom-up approach to budgeting.
Incremental budgeting is a process that starts with the previous budget and adds (or subtracts) an incremental amount to cover inflation and other known changes. Zero-based budgeting requires that all costs be justified by expected benefits. It is an alternative to incremental budgeting: the budget is based on the previous period's budget or on actual results, in addition to taking into account inflation and other known changes. Reverse budgeting is a technique that focuses on savings.
Instead of starting the month with what you can spend, first calculate how much money you want to set aside to save and then use the rest to cover your expenses. Reverse budgeting involves setting aside a portion of your income for savings (such as an emergency fund) before spending part of your income elsewhere. The formula varies depending on where you start. However, most people save 10 to 20% or more on each paycheck before using any remaining income for living expenses. Activity-based budgeting is a type of top-down budget that determines the amount of inputs needed to support the objectives or products set by the company.
It is useful if you tend to let your expenses increase over time and spend more than necessary on things like food or entertainment. Finally, it is recommended that 20% of income should be set aside for savings, and this can include retirement savings and emergency funding for things like car repairs or medical bills. If it is more convenient for you to pay all your expenses with a card, you can get several prepaid cards without fees that you charge every beginning of the month with the amount you intend to spend on a particular type of expense.
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