What Type of Budget Should I Use? (With Descriptions)
By Indeed Editorial Team
Updated October 4, 2022
Published December 7, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When you spend money on a regular basis, whether it's for personal or business purposes, keeping a budget helps you manage your expenditures. A budget is one of the best organizational tools people can use to handle their finances and improve their financial security. Understanding the different budget types is key to finding the best one for your financial needs. In this article, we define what a budget is and explain the main types of budgets so you can figure out which type of budget you should use.
What is a budget?
A budget is a plan for your finances or spending based on your income or business revenue. You can use budgets for personal finances and business to maintain financial stability between income and spending. A budget evaluates your financial activity by calculating how much money you gain and spend in a set period. Budgets consider the frequency of payments and whether they're regular or one-time costs. Having a well-planned budget helps to prepare for any expenses as they arise.
A budget is an effective way to measure your income in relation to your spending if you're trying to get out of debt, save money, or simply reduce your spending. For instance, your budget can tell you if you have enough residual finance to afford new expenses or if you can implement a more aggressive savings plan. Budgets are also helpful in deciding which expenses to prioritize and which are lower priority. It's common to plan budgets with pen and paper, on spreadsheets or with specialized budgeting software.
What type of budget should I use?
There are a few different types of budgets, each with its own purpose. Some of these budgets are effective for personal accounting, while others are effective for business budgeting. Here's a description of some of the main budget types:
A comprehensive budget is a detailed plan which helps you control spending for yourself or a business. Typically, individuals create these budgets in either monthly or quarterly segments to plan finances for the whole year. This budget helps people and companies reduce spending by setting limits on various spending categories.
Comprehensive budgets provide people with the ability to track their spending over a set period of time and can help prevent them from overspending. In business, a production budget, direct labour budget, sales budget and manufacturing overhead budget all fit into this category. These budgets can also include strategy explanations or even a list of steps necessary for reaching a financial or budget goal.
Problem-solving budgets are useful for identifying areas in which overspending is likely. This budget type can help you create spending limits on those categories to ensure you don't exceed your planned spending. If you're able to acknowledge where you're most likely to overspend, it gives you an advantage in making sure that you remain within your budget.
For instance, if you often spend too much money dining out, you may identify that last month you spent nearly $300 going out to eat. By identifying this as a problem area for your spending, if you're trying actively to save money in the short term, you may set a spending limit of $150 in the category of meal spending. A problem-solving budget can help you identify when you're approaching your limit and manage your spending to help ensure you don't overspend in the month.
Planning budgets are those which help you plan and prepare for particular situations or eventualities. If you're trying to save for a specific goal, this budget type is highly effective in planning your finances. For instance, if you're planning on purchasing a new home or going on an expensive vacation, you can use a planning budget to create a budget category to help you save enough money to afford this goal. These budgets also consider essential payments to help make sure your most important financial commitments get priority.
A master budget combines smaller budgets from each functional department in a business. This budget, which includes financial statements, income forecasts and a company's financial plan, summarizes the plans for spending across an organization. Management teams plan the business' activity using the master budget to determine available funds and achieve business goals. Master budgets can also be helpful for reallocating funds from one department to another.
A labour budget is a helpful tool when a business plans to hire more employees. This type of budget helps to determine the workforce required to meet the company's goals. Labour budgets are effective for determining the funds required for payroll, including hiring and paying new employees. These budgets can also be helpful for allocating funds for seasonal or temporary employees.
A static budget is one that estimates income and expenses, which remain fixed for the whole year. This establishes goals for the company to meet whether their income increases or decreases. Static budgets are most commonly tools for educational institutions, nonprofits, or governmental bodies which have a set amount of funds for their activities. The static quality of this budget type is useful in establishing goals and motivating those who handle finances to achieve those goals with the resources available to them.
Cash flow budget
Cash flow budgets give an evaluation of the incoming or outgoing funds within a set period. Companies create this type of budget using estimations from sales forecasts and manufacturing. The payables and receivables also factor into cash flow budgets, as they represent a large portion of the movement of funds into and out of a business. This is a simple budget, but one that's useful for providing an overview of the cash balance of a company.
Why do you need a budget?
Creating budgets is a highly effective method for keeping yourself accountable for your spending and helping to balance income with expenses. Budgeting proactively is also a useful strategy for establishing financial goals, whether they're short- or long-term. Keeping well-planned budgets helps with saving money in your personal financial plan, paying off debts, or managing a business's expenses. Here are some of the key benefits of creating and maintaining a budget:
Understand your spending habits
Through careful budgeting, you can see which expenses in your life are the most important and which costs you can reduce. Establishing expectations around your budget helps you to prioritize your outgoing costs and focus your spending on your most necessary expenses. For instance, when creating a budget for your daily costs, your rent or mortgage is an essential expense that needs to be paid first before luxury spending, such as a subscription to a music streaming service or purchasing a new television. After paying your most necessary expenses, you can allocate the remaining funds for other less essential expenses.
Stay out of debt
If you want to better manage your finances and stay or get out of debt, budgets are highly effective tools. Once you've evaluated your income, you can track your expenses and regulate your spending so that you don't spend more than you earn. In prioritizing your most important expenditures, it's easier to recognize potential debts and take actions to help ensure you don't accrue them now or in the future.
Relieve financial stress and anxiety
Budgets help to negate the stress and anxiety often associated with managing money. For instance, managing your finances without a plan may leave uncertainty about whether you have funds remaining for important expenses like rent or bills. With a robust budget in place, it can help ensure you allocate sufficient funds for your prioritized expenditures within the period. This can provide relief from financial anxiety and allow you to identify how much money you can responsibly spend on unnecessary expenses.
When trying to save money, creating functional budgets can help you allocate funds to save for later. For instance, if you're trying to save money for a big expense, like a wedding, a budget can be useful for setting aside amounts of money regularly to cover those large expenditures. Decide on a percentage of your income to separate from your accessible money so that you can't spend it. This way, the likelihood of overspending is also lower as you're limiting access to your own funds.
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