Incremental Budgeting: A Way To Gain Capital Over Time
Incremental budgeting is a type of budgeting that refers to adding a certain amount of capital on your previous budget or in the previous quarter, which allows a slight capital increase. This is often practiced by businesses.
Although this is a simpler method compared to activity-based budgeting, it is not highly recommended by most financial professionals. This is because it can lead to spending more money by the particular departments in a company. In fact, it can sometimes result in going beyond the company’s budget.
When using an incremental budget, the likelihood for each department to spend more than what is due is possible. Though this is done to suffice the amount of budget for each department based on the expenses in the previous quarter, the department might spend over that what is allocated to get an increased budget for the next period.
Who Can Benefit From Incremental Budgeting?
Businesses that deal in a fast-phase industry like tech can best benefit incremental budgeting. However, it may result in undesirable outcomes wherein departments will boldly overspend to get a favorable share for the next budget.
Although this applies to businesses, this is also a method that households are using. This is despite the fact that household finances are best manage with the other types of budgeting. Besides, there are several ways for households to manage recurring expenses rather than incremental budgeting.
When To Use Incremental Budgeting?
Speaking of family budget, the nature of incremental budgeting might be utilized if the other party is said to be the breadwinners while the other is a stay-home parent. In this manner, the breadwinner will set a particular amount in the household budget for each month while the other spouse will stretch this amount. In the case wherein the amount allocated is not used entirely, there’s a tendency that the breadwinner will reduce the amount. On the other hand, the other spouse may tend to overspend on groceries so as to increase the amount allocated for next month’s budget.
Thus, when talking about the household budget, a traditional way of budgeting is better. Though you can try incremental budgeting for your family budget to overcome household debt, the result might not be what you intend to expect.
How Frequent Should You Evaluate Your Finances?
Evaluating your finances will depend on the budgeting time frame that you design. For instance, if you design a quarterly budget, then you must then reassess your finances every quarter.
Furthermore, when scrutinizing your finances, you need to consider certain factors. You have to decide whether to retain each category or increase it. Also, you must determine if there are certain areas on your budget that you can reduce or decrease.
The Pros and Cons Of Incremental Budgeting
To understand incremental budgeting better, you must be aware of its pros and cons. These are as follows:
- Incremental budgeting is much easier to craft than activity-based budgeting. It will not consume much of your time, unlike activity-based budgeting.
- It can result in spending on non-essential stuff in your family budget. To avoid decreasing the allocated budget for each category, family members might tend to spend on things that are not necessary.
- Incremental budgeting do not necessarily benefit your household budget. Other Types of budgeting is way better in terms of managing family budget.
How To Set Up An Incremental Budget?
The following steps pertains on how you can set up an incremental budget:
Design a Budget
Incremental budgeting is design like how you initial start any type of budgeting. This includes categories for each expenses, which covers the latte factor. You can review your credit card statement or bank statements to ensure you got everything listed.
Examine Your Budget
You may need to agree as a family on how frequent should you reassess your budget. In most cases, a monthly budget review is feasible to anticipate costs for the next month. However, if there’s no significant changes towards the ratio of your income and monthly expenses reviewing it quarterly or every six months or per annum is fine.
Make Adjustments When Necessary
When evaluating your incremental budget for your household, you’ll have to determine if a necessary adjustment can be made in each category. This can be done when you keep track of your mode of spending. For instance, if your grocery expenses are high, you might consider adding a certain amount on your grocery budget. If your utility bills are high, you might consider adding budget on this category or check on how you can save on utility expenses.
Final Say On Incremental Budgeting
Incremental budgets remain suitable for businesses that are dealing with fast-progressing industries. This is because each department may need to have an increase in capital over the period. When it comes to creating a family budget, activity-based budgeting would be more suitable, especially if there are significant changes to the family’s financial condition.
CONSUMER PROPOSAL EXAMPLE
Example Unsecured Debts
|2||Credit card 1||$6,812|
Your Monthly Repayments Would Be
a Consumer proposal $748
(total contractual repayments)
a Consumer proposal $295
(total contractual repayments)
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