Trickle Down Budgeting Works

Does budgeting work? There are many critics that say tracking every single income and expense source is too complicated. That no one has time to handle budgeting for a family on a monthly basis. Is budgeting intimidating if you’ve never done it? Sure. But other than fear, what good reason do you have to not try budgeting for six months?

Budgeting…

• doesn’t require advanced math skills
• is all about planning
• shows you the surprising areas where more money than you thought possible is being spent
• helps you track your progress toward financial goals

In short, budgeting has so many benefits that it is worth giving it a shot to see if it works.

“Trickle Down” Budgeting

Ronald Reagan had “trickle down economics”, and I use trickle down budgeting.

All this means is the money for the month starts at the top of my piece of paper (or spreadsheet) and flows down toward expenses. If there is any money left after necessary expenses it flows down to savings.

You need the ability to do addition and subtraction. If you’re using a spreadsheet it will do all the math for you.

It’s simple: (total income) minus (total expenses) equals what’s left for savings.

Income Categories

You need to track your total after-tax income every month across all income streams. For those working on a salary this should be extraordinarily simple: your monthly check (or preferably, direct deposit) should be the same every month.

For those working hourly jobs or get paid a varying commission it can be a little bit more difficult, but you should still have a solid estimate of how much money you’ll have every month. Part of my work compensation is commission and I always estimate on the lower end of expectations — that way I only get good (“we have more money than we thought!”) surprises rather than bad (“we ran out of money!”) surprises. Factor in other income as well: interest you earn in your savings accounts or money from side jobs.

Total everything up and just track this for a few months. A fairly clear picture should emerge with how much income you can consistently rely on for monthly expenses.

Expense Categories

This is where it gets tricky. You can make this as complicated or simple as you like. If you’re just trying budgeting out you might want to try making it simple and growing from there. We have grown our budget to the point where we have an expense category to cover just about everything we spend money on. Groceries, cell phones, individual utilities, car maintenance, car insurance, and so on.

But that can be overwhelming at first, so work with what works for you and go from there.

Total up your expenses and subtract them from your total income. Anything left is savings.

Savings Categories

If you’ve still got money left at the end of the month, congratulations. You can use these excess funds to achieve long term financial savings.

We’ve got multiple categories here, too. Things like our emergency fund, buying new cars with cash, and saving for childcare expenses in the future.

But again, if you’re just getting started you need to keep it simple and focused. Get your emergency fund up to par before doing anything else. This means 3 to 12 months of expenses, depending on your household income situation. And you’ll be able to estimate the cost of 3 to 12 months of expenses because you just did the expenses portion of your budget. Total that number up and multiply by the number of months. Then get saving.

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