No matter your financial goals, it’s important to have a budget you can rely on. With so many different types of budgets to choose from, it can often be overwhelming to know where to begin. One popular type of budget is known as bottom up budgeting. Though typically associated with businesses and large companies, bottom up budgeting is a strategy that can be applied to a number of different situations.
Compared to top down budgeting, this is when estimates for each category are added up to reach the total. Essentially, you start from the bottom, or individual areas of your budget, and go upwards until you create a total. This can be helpful if you’re not sure what a reasonable budget is for your lifestyle, or if you’re looking to adjust to a new salary.
Whether you’re paying off debt long-term or saving up for something big, a budget is a must. Luckily, it’s never been easier to create the right budget for your needs. In this guide, we’ll share what bottom up budgeting is and how it can help you.
How Does Bottom Up Budgeting Work?
First, let’s further explain how bottom up budgeting works. While you might have heard a lot of different financial terms like debt snowball or debt avalanche, bottom up budgeting has its own process. In bottom up budgeting, you first start with detailed estimates for each category. These categories for a family might be things like:
- Savings goals
- Debt payoff
- Emergency fund
From there, these estimates are added together to make a new number. This total is your total budget for your family or organisation. You can imagine this process like a pyramid. By adding together all of the components of your budget at the bottom of the pyramid, you arrive at the total on the top. This is a lot simpler than worrying about a bunch of moving parts, and it can be more accurate than other types of budgeting.
Let’s look at an example to understand bottom up budgeting in more detail. Consider you have a family of 4 that lives in Sydney. Here might be some of their budget categories:
- Rent $2,400
- Utilities $300
- Entertainment $250
- Debt payoff $400
- Transportation $100
- Food $400
- Savings $300
Adding these together, you arrive at a total of $4,150 for the bottom up budget. This means the family needs to bring in a total of $4,150 per month to make these budget goals. Any extra funds could be allocated towards a new or existing category. When families think of their funds by what they need to spend first, they can focus on their savings and debt payoff goals.
Why Use Bottom Up Budgeting?
With so many budgeting apps and methods nowadays, why use bottom up budgeting? There are a lot of advantages to this specific option over others. While it’s important to find what works best for you, many choose bottom up budgeting for these pros:
- Detail: Because you focus on specific categories and expenses first, it’s much more detailed than other types of budgeting.
- Accurate: Similarly, a bottom up budget is more likely to be accurate to how much you actually spend not just spending goals.
- Easier: Because you’re not told what your budget should be per category, it’s easier to adapt to this type of framework. It’s less restrictive, and it allows room for change and growth over time.
However, there are some times when you might not want to use bottom up budgeting. Because you start with individual categories, it’s possible to encourage overspending. For example, if you’re already spending too much on groceries, you might not build room to change this into your budget. This is why there’s no such thing as one-size-fits-all when it comes to budgeting. Instead, find what works for your family and goals.
Bottom Up Budgeting vs. Top Down Budgeting
Next, how does bottom up budgeting compare to top down budgeting? What’s the difference between these two options? A top down budget is something most people are likely familiar with already. This is when you come up with a total number you can afford to spend per month and divide it amongst your spending categories.
Following the example above, instead of calculating how much you spend on food, rent, and utilities, you decide you only want to spend a total of $4,000 on these categories and saving the remaining $150 per month. From there, you divide the $4,000 to fit each need. While this might help you keep your overall cost down, it can be hard to stick with this type of strict budget. Bottom up budgeting allows for real-world changes and needs.
Create a Strong Budget
No matter what type of budget you decide is best, make sure you stick to it. Budgeting isn’t just for those trying to pay down debt. It’s a way to live life within your means. A bottom up budget is a great place to begin.
Are you struggling to find a budget that works for you? The team at Debt Busters are here to help. Contact us today on 1300 368 322 for help creating a unique, customised budget with your goals in mind. You don’t have to take this first step alone.