2024-03-26
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Grow Your Wealth

What is Incremental Budgeting?

Looking for a budget? You might have heard of incremental budgeting. This technique is pretty simple to get started with. Let’s check it out.

What is Incremental Budgeting?
IN THIS ARTICLE:

While budgeting can be dull, it’s a great way to get on top of your finances. Today, we’re looking at incremental budgeting, a money management technique primarily used in the corporate world. Like zero-based budgeting, you can also adapt it to manage your finances. 

This budgeting technique uses your previous budget, making it super quick to set up. It uses increments, which are small, regular increases or decreases. You simply adjust it slightly for your current goals, needs, and expenditure. Let’s get into the pros, cons, and more ⬇️

How to create an incremental budget

Already got a budget? Great, that’ll make this faster as you’ll know what you’re spending. If not, it’s super simple to get started. We promise.

Check your expenditure from the last period you’ll be working with. Whether that’s a month, quarter, or year, make it work for you. Once you’ve categorized all your spends for the timeframe, you can start adding or decreasing small amounts.

Let’s say one of your streaming subscriptions is going up next month. Account for the increase in your entertainment budget. Rent going up again? Increase your housing budget. 

You’ve decided your takeout habit is a little out of hand, so you want to cut it down. Decrease your budgeted takeout spend. 

Maybe groceries are getting more expensive thanks to never-ending inflation, so account for that in your next budget. Pretty simple, right? 👁👄👁

Pros and cons of incremental budgeting

If you wanna know how to budget the incremental way, it’s good to know the pros and cons. 

Advantages of incremental budgeting

Easy to use

Unlike other budgeting types, it’s really easy to work with incremental budgeting. So it’s ideal for people just getting to grips with budgeting, whether for personal finance or small businesses. AKA you’re less likely to give up before you’ve begun. 

Easy to understand

While some budgeting methods feel like ??? when you look at a spreadsheet, incremental budgeting is simple. Plus, small changes can feel more manageable than allocating bigger budgets. Ideal if the very mention of math gives you an anxiety attack 🙃

Less time to create

While some budgets take a long time to set up, incremental budgeting is nice and easy to get started with. It relies on a previous budget, so the work is basically already done. 

Being prepared

If you use incremental budgeting to factor in inflation and cost increases, you won’t be blindsided. Assuming cost increases in your budget means you’re prepared for the worst. And if prices don’t go up, you’ve got some cash to spare for your emergency fund. 

It’s also wise to incrementally increase your savings goals to keep you moving on your financial independence journey. 

Can encourage career progression

If you know how much everything will cost, you might wanna increase your spending power. Perhaps that’s getting a new job, taking more hours, or progressing in your current role. So if your landlord increases your rent again, you’ll be annoyed, but ready 💅

Disadvantages of incremental budgeting

It encourages overspending

If you put too much money in certain categories, you could be spending more than you need. And unlike other budget types, you won’t necessarily notice it’s an issue. 

While it can feel nice to spend a load of cash, you could possibly be putting it into better places. We don’t wanna remind you about retirement (lmao, is that gonna be possible for any of us??), but…😅

It isn’t that flexible

As you allocate your money based on the previous period’s spends, it can be tricky to handle unexpected expenses. That’s where an emergency fund can come in handy, but it only lasts so long. 

Incremental budgeting vs zero-based budgeting

Zero-based budgeting (ZBB) is, you’ve guessed it, another type of budget. With ZBB, you distribute all current income across categories, while incremental budgeting works off recent outgoings with small tweaks. 

ZBB technically doesn’t even acknowledge previous expenditure, as you’re starting from a zero base. So last month’s takeout habit is already forgotten in the eyes of ZBB 😉 While that sounds great, ZBB still wants you to look at your spends and use your income ✨carefully✨ 

Pitfalls of the two methods

If you want a budget that’s quick to set up, incremental might be the better choice, as ZBB can take a while to put together. We go over this technique in detail in our zero-based budgeting blog. Basically, you work out your previous spends and income, categorize it all, and assign your income to each category with the goal of $0 left. 

With incremental, you’ve still gotta do the work and get all your numbers together. But you’re simply increasing or decreasing the previous amounts spent rather than setting aside all incomings. 

And that’s a key issue with zero-based budgeting. While spending all your money every month sounds aaaamazing, it can also put you in a tight spot if you’ve not allocated plenty to savings 👎

Pre-allocating funds to certain categories can leave you short. Say groceries cost more one month. You’d have to take money from elsewhere in your budget, so you might not be able to afford to save or put money into your IRA. 

They both kinda encourage overspending. But you can always include a savings category and overspend there instead of Taco Bell 🙃

Cleo’s final thoughts

Incremental budgeting can be a simple way to get on top of your money situ. With small increases and decreases in your budget, money can feel much more manageable 🙏

Not thrilled by the idea of budgeting? Not to worry, Cleo has a solution. Her budgeting app makes managing your finances fun. Yep, really. She’s your AI guide to better budgets and a healthier bank account 💙

Cleo comes with a spending tracker, bill reminders, and overdraft alerts, so you’ll be ready to crush this capitalistic world in no time 🤠

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