Choosing the right type of budget comes down to what you need it to do. A budget can control your monthly spending, create financial safety, or help achieve your financial goals. Below is an explanation of a few different types of budgets.
A Comprehensive Budget, also known as a Master Budget, is a very detailed budget used when you want to limit your spending. This type of budget is often used when you have a limited income and you need to cut back on your expenses. A Comprehensive Budget keeps track of your spending by creating a detailed list with categories for all your expenses, usually for a month at a time.
Use this budget to cut back on your expenses by setting limits to the different categories on your list. Determine the income you generate during the period of your list (i.e. if your list is monthly use your monthly income) and use it to set strict limits for each category. By setting strict limits to each category on your list you can track whether you are spending too much or not on each category.
You can also use the Comprehensive Budget to review the way you spend money over time, this is called an Overall Budget. The difference with this type of budget is the detail of the categories and time period the budget spreads across. An Overall Budget has broader categories and the time period is usually over a year instead of a month. This budget will allow you to compare your general spending over the years.
Problem Solving Budget
If you used the comprehensive budget and notice that you are having trouble controlling money in a few areas, such as entertainment or beauty a problem-solving budget may help to address over spending in these areas. By creating a finely detailed list for these problem areas (more detailed than the general categories for your comprehensive budget) you can limit all the ways in which money is spent among these categories.
For example, if you have a category designated for clothing, you may want to finely detail the category to include the type of clothing and for which member of the household it was for. Later, review your clothes spending and figure out how many of the items you bought were needed or put to use. You may find that you are spending too much on certain items, like shoes. The problem-solving budget will help identify these problems in your spending.
If you are budgeting in order to save money for a something, such as a vacation or a new home a planning budget can help achieve your goal. The Planning Budget works by adding an additional category to your budget that you designate for the goal you are trying to achieve.
To make this budget work, you must pay for your other expenses first. Once the rest of your budget is met, you can take any left over money and add it to this extra category. This category can be named whatever you like, and can even be used as an emergency fund. The money added to this category is not spent; instead, it is saved until you reach the amount needed for your goal.
Another variation of the Planning Budget is the Cost-Saving Budget. Unlike the Planning Budget, the Cost-Saving Budget helps you increase your yearly savings instead of saving money for a defined goal. To use this budget make an additional category for savings or emergencies. Next, look over your budget from year-to-year, looking for ways to lower your overall expenses.
For example, instead of buying cheaper clothing, you may spend more up front for clothes with quality fabrics. It may cost more up front, but in the long run you will save money because the clothes last longer, meaning you don’t buy clothes as often. You can even try stocking up on winter clothes in the summer or summer clothes in the winter because out of season clothing is usually cheaper in price.