Can Corporate Bottom-Up Budgeting Principles Apply to Your Personal Finances?
January 31, 2023
While there are certainly many differences between your personal spending needs and corporate spending, understanding a business-based approach to budgeting may help you see spending and saving in a different light.
For instance, businesses have different techniques for budgeting. The two most common types are top-down budgeting and bottom-up budgeting. These different approaches to budgeting take spending into account from different angles.
It’s a lot simpler than it seems, and you may even find these strategies useful! Here’s what you should know.
What is bottom-up budgeting?
Bottom-up budgeting is a budgeting technique used by businesses. Basically, a total budget is made up of many other smaller budgets. In a corporate setting, these smaller budgets would come from each department of a business, like human resources, sales, or marketing. Each of these little budgets includes overhead costs, salaries, and project spending.
Each department looks through its own budgeting needs before submitting a proposal to higher management. This could include prior spending, paychecks, and project estimates. Once they have their budget, management pulls together these numbers to create an organizational budget. This creates a budget that takes everyone’s needs into account.
Make detailed, specific estimates
Bottom-up budgeting is used because it keeps management informed about each department’s needs. When departments are able to weigh in on the overall budget, they can cover costs that would otherwise be skimped over if management was creating the budget on their own. So, it keeps everyone accountable.
These estimates need to be detailed and include all possible expenses. This is obviously very important in a corporate setting, as departmental budgets are fixed. If something isn’t factored into the budget initially, the money isn’t put aside for it.
To make their budgets as detailed as possible, departments use former budgets to predict their regular costs. They look through their invoices to track how much they spent in specific categories. They predict problems that might arise so they can cover all of their bases. If you know the fundamentals of budgeting, this will be familiar to you: departments are tracking their spending.
Why do people use bottom-up budgeting?
This form of budgeting gives departments the input they need into their spending and allotted budgets. The departments are the most informed about what they need, and these budgets are usually a more accurate representation of organizational needs. It also reduces the frustration of staff being restricted by cuts to budgets that stem from managerial oversight.
When departments set their budgets themselves, it doesn’t just hold management accountable. Because they’re making the decisions for their budget, it ends up motivating employees to honor their agreement. This also gives them a sense of control over their budget, which might make them more motivated toward company goals.
Bottom-up budgeting is a more holistic approach to budgeting. It’s based on the actual needs of individuals rather than estimates from someone removed from the situation.
What are the downsides to bottom-up budgeting?
That doesn’t mean bottom-up budgeting is perfect, though. It does have its own disadvantages compared to top-down budgeting.
For instance, it’s common for department heads to over budget to make sure they have enough money for the year. To give themselves some extra padding, they end up creating a budget where resources aren’t used accurately. In a company, this is a big no-no, as those resources could’ve been used for more important things in other areas.
Being inaccurate with the budget or distorting estimates can lead to an ineffective budget. It skews budgeting goals away from the organization as a whole to one department in particular. For a corporation, you want to use the resources you have at your disposal efficiently, and this overcompensation can cause serious roadblocks later on.
How to apply this budgeting principle to your own budgeting
It’s no shocker that there are a lot of differences between business and personal expenses.
So, why does this matter to you? Well, there’s actually a lot to learn from this technique! Bottom-up budgeting is focused on collaboration, accurate estimates, and long-term goals. All of those values are super important for personal budgeting, too!
Make budgeting a collaborative effort
You may not have “departments” in your household, that’s a given.
However, you may be living with a partner or be the head of a family. If you look at it a certain way, these are much like departments of your very own. And, just like a corporation, it’s important to make sure everyone’s needs are being met. You don’t want to be making sacrifices in areas that are important to other members of the family.
Have your family members act as “departments.” Put them in charge of estimating their own expenses for different categories. Your family may vary in terms of maturity, but giving them the independence to weigh in on decisions that affect them is always a good idea. Plus, this could be a great opportunity to teach your kids about budgeting.
Hobbies, school expenses, personal spending needs, and more should be estimated and weighed in. These expenses are going to come up whether you want them to or not, so it’s better to be prepared. Once everyone has come up with their budget, you can take a look at each one, modify it a little bit—honey, we don’t need that much for snacks—and add it all together.
Using the principles of bottom-up budgeting, you can help your children feel empowered while holding them accountable. Just like a manager, you don’t always want to be making decisions for them.
Use accurate estimating procedures
Another great habit we can learn from bottom-up budgeting is being thorough when we’re estimating our spending. Usually, when you predict how much you spend in a certain area, it’s not a life-or-death scenario. Nonetheless, we should all be doing our due diligence when we’re calculating our budgeting categories. Forecasting expenses is important because it keeps you out of the dark about financial needs.
When you’re figuring out your budget, pull out all of your materials. This could be bank statements, credit card statements, old bills, tax returns, or anything else that would help you make decisions. Then, when you’re figuring out your spending for the month, you can pull on real numbers that are more in line with your habits.
Also, this is a perfect time to audit how you spend your money. How do you want to cut costs? Are there ways you could reduce your spending somewhere? When your estimates are more accurate, so are your solutions!
Determine your “organizational goals”
You may feel like your brain is a whole organization of different people all wanting different things, but, unlike corporate settings, your budget isn’t a make or break for anyone’s annual bonus. If you’re an individual budgeter, you don’t need to worry about others when making your budget, so you can set your goals yourself. But that’s not true if you live with others.
Your family is sort of like a mini-organization, so setting goals together would make sense! Together, you and your family can figure out what your “organizational” goals are. Maybe it’s been a while since you went on a vacation. Maybe you want to renovate the house a bit. Maybe you need a new car. Whatever it is, creating goals together encourages your kids to work toward them, too.
If you’re living with a partner or roommates, the same is true. Creating goals together is great for bonding, and it also helps with meeting the needs of others. Maybe you need a new microwave. Maybe you want to upgrade your television. Maybe you’re looking to find a better place. All of this can be achieved by a determined budget.
Based on how well your budget is going, you may even have some extra money left over. Unlike a corporation, this is a good thing! You can roll it over toward your goal or decide with those you’re living with what you should do with the extra cash. If motivation has been hard for you all, a reward of some kind may be the best bet.
SaverLife helps you save, even if you’re starting from the bottom
As you can see, there’s a lot you can apply from business budgeting to your finances. Saving for the future to meet your goals is smart, no matter your situation.
SaverLife is here to help! With SaverLife, we encourage you to become financially resilient by rewarding you for each dollar you set aside. You’ll get points you can turn in for rewards, and there are plenty of challenges to keep you motivated during your saving journey. Ready to tackle your savings? Sign up for SaverLife for free today!