Is Traditional Budgeting Out-Dated?
Traditional budgeting may be falling out of grace with the everyday household. The traditional budget is also known as a fixed budget largely due to its inflexible style. This type of budget uses the income and expenses from the previous year or month to predict the next month or year’s budget. Traditional budgeting is much easier to initially create because it is meant to predict a future period of finances by looking at the previous period. While this type of budget may be well suited for a household whose expenses and income are totally fixed, in most cases the traditional budget ends up being a little too rigid.
Using the Past to Predict the Future
If you are trying to predict next month’s income and expenses, it can definitely be helpful to use last month’s spending as a general guide, but it usually cannot be used to create a rock solid budget for next month. Why? Some of the income or expenses from the previous month may be irrelevant for the next month. For instance, say your household spent $120 on gas last month. You could predict that you will spend an equal amount next month and work your budget around that, but realistically this number is very likely to change. You may have to take an unexpected trip out of town or take a few more trips to the store than you did the previous month. Or there could be an extra bit of income, such as from a bonus, that would not be applicable to next month’s budget. Fixed budget items, such as rent or mortgage, cell phone bills (if you’re on a fixed-rate plan), TV and internet, medication, car payments and insurance, and medical insurance can typically be predicted by using the previous months’ bills and receipts, so the concept of using past expenses during the budgeting process can still be useful.
Non-fixed expenses are those which will occur every month but tend to fluctuate in amount. Examples include electricity, water, gas (natural/propane), gasoline, cell phones, and groceries. These expenses are often more difficult to budget for unless you make special arrangements to influence them, such as making sure you don’t go over the minutes on your phone plan or creating and adhering to a meal budget. You are less likely to be able to control your electricity, water, and gas bills, especially during winter and summer. You can, however, keep them down by taking energy conservative measures around the house. Other non-fixed expenses include toiletries, meals out, and hair cuts. Accounting for non-fixed expenses in a traditional budget largely consists of overestimating so that you are sure to have enough money to cover these expenses. With any luck, you can have money left over rather than coming up short, but the downfall with this type of budget is that one bad month could throw off the budgeting for several months in the future.
Unexpected expenses are a big issue with traditional budgeting. It is virtually impossible for a household to run without any hiccups or unexpected expenses cropping up every now and then, such as having to buy a wedding gift, car maintenance or repairs, and medical or dental visits. These usually are not accounted for in a traditional budget and can void out future budgets. What happens when you find yourself having to fork out a couple of hundred dollars for new tires or having to purchase a plane ticket one month—that you weren’t counting on having to buy? If this expense put you “in the red” during the current month, then every future month’s budgeting will be wrong. This is because the income used to predict those monthly budgets will be off by the amount needed to cover the previous months’ insufficiency. If you are lucky enough to have the money in a savings account and could afford the expense, then you might be able to get by without having to make too many adjustments to future budgets, but you understand the general idea here. Traditional budgets have no way to predict these unexpected expenses. The best it can do is allow for a savings of whatever balance is left at the end of the month. This, too, can be difficult, because many people like to use the money left over after bills and everyday expenses to go to the movies, put in a vacation fund, and even gardening or home maintenance supplies.
Traditional budgeting served its purpose many years ago when expenses were not so varying, but in today’s time it seems that every day expenses simply aren’t as easy to predict as they once were.