The end of 2010 is very near and if you’re like most people, you’ve already started to think about new year’s resolution for 2011. Have you looked at your budget goals for this past year? How have you done? Have you met your financial goals or did you struggle to make your ends meet? For me personally, I did not do very well. I went over budget almost every single month this past year with 6 of the 11 months so far having spent more money than I was able to generate. This is how it unfolded:

budget-2010

As you can see, so far this year through November 2010, I spent more than I made and did not help myself in having enough savings for emergency. My goal was to save almost $11,000 by this time of the year and I failed miserably. I do have to admit that I was being a little ambitious with my budget when I created it about this time last year. I wanted to save as much money as possible, but at the same time, spend enough so I don’t deprive myself from enjoying life. But even so, I still feel that my budget will work most of the times. I think this year was an anomaly because of unexpected costs for a new carrefinancing of my house, and the engagement ring. Those were some big purchases and had they not been in the picture, I would have met or exceeded my savings goal for 2010. But then again, it appears that every year is an anomaly.

So what’s the best way to budget? There are two basic strategies that can be used to budget effectively and efficiently. Many people use the Top-Down Budgeting model while others use Bottom-Up Budgeting model.

Top-Down Budgeting Model

Top-Down model is exactly what the name implies. Basically, you set a dollar value you want to save in 1 year. Then you work the math down for each and every budget categories to try to meet that savings goal. Say you bring in a net income of $100,000 for 2011. You want to save $50,000 by the end of the year. That means, you only have $50,000 remaining for all your expenses. How much you allocate to each of those expenses every month is where your math comes in. After giving a budget for each category, if you still have $10,000 left over, you can use that is a cushion for unexpected costs, like a new car or something like that. This method is effectively for those who need to save a certain amount of money to reach their long-term financial goal. It doesn’t have to be $50,000 goal every year. It can be as little as $10,000 or even $1,000, all depending on your net annual income.

Bottom-Up Budgeting Model

Bottom-Up model is exact opposite of Top-Down model. Instead of having a set amount of savings you want to achieve, this model helps you save as much money as it is possible simply by forcing you to spend as little as possible. In this model, you add up all of the expenses from each and every category and subtract it from your monthly net income. If you have a positive balance, then that’s the amount you saved that month. If you have a negative balance, then you spent too much money that month. This method is more stricter and if you don’t have a specific long-term savings goal in mind, then this model is the way to go.

Bottom-Up and then Top-Down Model

Top-Down and Bottom-Up methods are respectable and effective ways to budget, but not all budgets are created equal. There are static expenses that do not vary on a month to month basis. Cable and Internet bills, car payments, and insurance bills are such examples where you spend the same amount every month. There are nothing you can do about these bills. However, there are bills that you can do something about. Credit card bills, gas and electric bills, and cash spending are all examples of dynamic bills which vary from month to month. You actually have control over these bills and it’s from these dynamic bills where you can control your savings. So for those static bills, use the Top-Down model. For dynamic bills, use the Bottom-Up method by setting a set budget for each of these dynamic categories and sticking with them. For my car and mortgage payments, they will always be a set amount every month for a very long time. I can’t do anything about them. I have to pay them. But for my credit card bills, I can control what I spend and how much I spend. If I give myself $300 every month on credit card expenses, then that’s all I’m allowed to spend. Below is my proposed 2011 monthly budget. This budget accounts for expenses after marriage, so the numbers are marked up from last year’s budget. The highlighted categories are those that reflect Top-Down Model and the non-highlighted categories reflect Bottom-Up Model.

budget-2011

I prefer the bottom-up and then top-bottom model for all my budgeting purposes because of the flexibility it provides with your spending. Sometimes, only when we look at the areas, such as credit card spending, we realize that we really don’t need to be spending that much money on certain items. Out of all of my categories on my budget sheet, credit card and cash spending are the biggest variables. Although I wish to cut down on my credit card spending, my strategy is to cut down on cash spending and transfer that over to credit card spending, mainly due to cash back rewards associated with credit cards.  If I can cut down on those spending, then I will probably be able to save even more money and reach my budget goals just that much quicker.