I was in a discussion about budgeting and eventually decided that there are two primary types of budgeting by households. I called them “bottom-up” and “top-down”. However, there are some differing definitions of these terms floating around, mostly in connection with businesses or governments. So first, some quick definitions:
Bottom-Up Budgeting is focusing on your spending and trying to manage each one. You keep track of your spending, either item-by-item with lists or by category using software like Quicken or Mint.com. You look at each expense somewhat holistically and decide consciously if you need to cut back or if you are happy with the amount being spent. Whatever is left, is put into savings.
Top-Down Budgeting is the simpler, big-picture type of budgeting. You decide how much you want to save from your income, either by percent or total amount. Examples: I want to save 10% of my take-home pay. I want to save $1,000 a month. After you figure how much you want to save, you just try to set that aside, and spend the rest however you like.
Alternatively, you might say “I want to spend $3,000 a month total.” I still consider this top-down budgeting if you are not looking at each expense separately each month. The focus is still basically saving some fixed amount for the future.
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It depends on your level of debt.
If you’re deep in debt. I would definitely manage your expenses line by line.
I have no debt and I do a mix: I first allocate how much goes to mandatory retirement and emergency fund savings, then I track my expenses using Mint and try to cut back excess spending. The rest of the money is free for spending and any left at the end of the month gets put into short-term savings for things like gadgets.
My husband and I have a joint account, which I also track on Mint, that we use for all household expenses and shared entertainment; because of that, my personal accounts don’t fluctuate that much every month so budgeting is easier.
Personally, we make sure we can pay our fixed cost first. Then max out and auto deduct the saving (401k, stock). Lastly give ourselves an allowance each week. Pretty simple, whatever is left goes into the emergency saving.
I do the Top Down budgeting system. Pick a certain amout to save in the emergency fund (6%) and retirement accounts (15% combined)and work from that point.
I currently do the Top Down as others have said, automatically sending the same amount of each paycheck to retirement accounts and other savings.
But for the money left over after that, I’m trying to implement a Bottom Up approach. It’s easy to look at Yodlee’s chart of my credit card spending by category and say, “I’m spending too much at restaurants each month.” In practice, I’ve found it hard to actually implement a fix, as my spending habits are hard to break. Still working on it, maybe it’ll be a 2011 resolution to get the Bottom Up approach working in addition to my existing Top Down approach.
I prefer the bottom up method because our monthly budget has almost no wiggle room, we need to track how much we are spending each week at the grocery store to stay on target.
I use a combination of both:
– I have a set amount I want to save every month, plus;
– I have a budget for each category. I tend to overspend on groceries (I love to cook), but underspend on clothes (my girlfriend sometimes calls me her ‘bum’). With my budgets I see that I have money ‘left’ for clothes and that I need to reinvest in my wardrobe. I’m really pleased about this setup.
Sometimes you just gotta spend what you need to spend.
I use the Bottom up and never tried the other that is why I voted Bottom up.
The thought of Top-Down seems interesting if I were in desperate need to achieve a goal, such as getting out of debt. I would determine how much I needed to save or pay down debt at a specific date and set those saving/debt payment actions on automatic through online or balance transfers. Than the remaining amount I would use towards all other expenses. This seems like a tough process, as you would have to take in account your rent/mortgage and fixed expenses in determining how much you can set towards savings/debt payment.
Since I have a quality of living that I would not want to sacrifice greatly, I determine how much I need to spend on expenses were I could live comfortably with spending on cable, nightlife, out to dinner, entertainment than evaluate how much I spend on gas, rent, groceries and whatever is left is what goes to savings/debt payment. I constantly evaluate if there is room to cut back on expenses or earn extra income in order to increase my savings/debt payment.
I think it takes a balance and looking at it somewhere in the middle of your needs/wants and determine if you need to cut back on expenses and earn extra income.
Like the others – it depends.
Bottom up budgeting? Definitely when income is lower and it is impossible to meet all my savings goals. There have been times I have had to be fierce with expenses, and be lucky to save what is leftover.
Actually, now that I think about it, I have been the same when flush with income. So, manage the expenses and save the rest. But the real answer is there isn’t a lot of thought to budgeting in my house, when income is higher.
For the most part, we do a mixed approach. “Pay ourselves first” and the remainder is for the bills. BUT, it’s not really that simple. As we age, I feel like our expenses should level off, or even decrease. So, we also make an effort not to increase our monthly/annual spending. Then it morphs into something like both approaches at once. Ideally, at some point, there will be something in the middle left over to add to savings. (I think more to the point – we try to keep our fixed expenses low – and the middle would be more like one-time things – if we had the extra money and all our savings goals were met. But I wouldn’t want to commit to higher and higher fixed expenses just because savings goals were met. That is the caveat to our mostly top-down approach).
I think the point is you can do either/or, but if you can do both, you may be even more efficient. But, I have argued with people who think “saving the leftover” isn’t good enough. If you want to tell me that having no debt and saving 50%+ of our household income “isn’t good enough,” then so be it. I respectfully disagree! The truth is that both methods have their place.
Pay yourself first!
Before I pay any bill, I siphon off a percentage of my net and funnel it away in an account which will then be invested somewhere.
If you treat your self as a person you owe money to… just like the gas company, or a a mortgage payment, then you will always have something saved.
I picked bottom-up, but what I do is actually closer to The Millionaire Next Door philosophy of “artificial scarcity.” I don’t buy what I don’t need, and what I do need, I take time to decide if I really need it, and if there’s a better way to get it (including borrowing, renting, comparison shopping, etc. We are both teachers, have 3 kids, and end up with 50% of our paychecks in savings, so it works for us!
no brainer – top down. why would anyone want to manage to their expenses? manage to your capacity instead. know what you take home, what your saving/investing objectives are and manage the rest accordingly
If all you want is money to retire, then top down is fine.
If you want to get off your butt and change your life, then bottom-up tells you the story of your financial life and will tell you where you are spending your money and how you can change your spending to put more money to the things that are important to you.
Top down is lazy.
Both approaches have merit, but I start with the top down. I start with an annual plan of how much I expect to have coming in, and how much will be going out for mandatory items, such as mortgage, car, retirement. I then play with my discretionary budget based on what I spent last year in major categories, and see if there are any unusual one-time large expenses that maybe won’t occur again. I then figure what my savings target should be. I periodically check my savings for the year to see if I’m on track.
I’ve tried top down and bottom up budgeting and have found that I am able to save more with bottom up. My family has been using YNAB (You Need a Budget) for approximately 2 years and we have saved a lot of money by knowing exactly where each dollar goes. We have three main categories that we use, Needs, Wants, and Savings. Each of those categories have sub-items, e.g., cable, gas, electric, mutual funds, water, etc. Anything we have left over at the end of the month is either added to the savings category or put in one of the other categories for anticipated expenses.
I don’t really budget … I am pretty clear between my wants and needs. Almost all of my spending is on needs. Being able to save and invest most of my income feels better than just about anything I might want.
I think things are a bit tricky now when it comes to saving money because things are so unpredictable in the work place. I do think that a much larger emphasis has certainly been placed on savings in the home in our current state.
Interesting insight Jonathan, I never quite thought about it this way. I guess I’m a little bit of both but definitely a top down budgeter…. think about my goals in terms of savings for the month and then try to make the rest of it work. However, if I’m trying to eliminate spending I have to start from the bottom… it’s actually kind of an interesting exercise to go through ALL of your expenses one by one or category by category and brainstorm ideas on how to save money. I mean… really look at and every single line item. Every time I do I’m surprised by the little opps here and there that add up to a big savings in the long run.
Through out different times of my life I have been all of the items on your poll. When I am making a ton of money I fly by the seat of my pants. When I make less money I tighten things up a bit.
Definitely a top-down budget. It imposes discipline at the outset. And it may be lazy, but it that is its advantage, it works on auto-pilot, provides a margin of error, and creates greater freedom. The key thing is to have a budget system of some sort. And it has transformed our financial situation. But we are still frugal, and definitely live below our means.
We use Bottom-Up Budgeting because my husband is self employed and we don’t know how much money we will be making each month. I want to make sure that we can cover all our expenses so adding to savings is last on our list, but we live a frugal life and try to make some side income every month. Savings may be last on our list, but it’s not in the checking account waiting to see if there is money left at the end of the month. I write out the budget on payday and add to our savings account right away if possible.