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Incremental Budgeting
By Sybria White on June 4, 2010

802377_89113338-(1).jpgTruthfully, sticking to a “set in stone” budget is no easy feat. What you may have to turn to is a personal incremental budget. Incremental Budgeting implies using a previous budget or your actual spending habits as a basis for your current budget1. Your past spending serves as a tool for the new budget, and you use this information to add incremental amounts as you go along. This type of budget forces you to look at how you are really spending your money, what you are spending your money on, and how to change how you budget in general. There are many advantages to using approach but there are also some drawbacks.
The gradual change that results when using an incremental budget is one advantage and contributes to why it is so stable1. If a change crops up you will be able to notice it immediately. For instance, let’s say your phone plan is $50 bucks a month. Although you have been on top of how many minutes you are using, your text messages spill over for the holidays. In November you go slightly over how much money you allocated in October. In December the same thing happens again. Because you used an incremental budget you can gradually change how much you are spending in this area without feeling guilty. If you follow a set in stone budget, and the allocations for various areas stay the same during the year, it becomes very difficult to follow as prices generally fluctuate during a recession. Therefore I recommend following an incremental budget in relation to a fixed traditional budget.

Although this gradual and stable quality is an advantage, this budget also assumes that everything will stay the same2. This is one of the drawbacks of an incremental budget. Another drawback is that although you can notice change quickly, there really isn’t an incentive to reduce costs, if you gradually adjust your budget over time it will most certainly discourage you from looking for ways to lower costs2. In addition to this drawback, this budget is not recommended during times of change, because it fails to take changing costs like fluctuating gas prices, into account2.

A personal incremental budget may be helpful if you have trouble sticking to a set in stone budget because it helps you be more realistic about your spending and you can avoid the guilt of not spending exactly how much you planned to spend. It gives you a chance to notices a larger change quickly and make adjustments. This type of budget therefore is much more forgiving than a traditional set in stone budget that has fixed allocations month after month, but do know it comes at a cost.
Source:
1http://en.wikipedia.org/wiki/Zero_Based_Budgeting
2http://www.small-business-accounting-guide.com/incremental-budgeting.html
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