How Many Kinds of Budget are There?

The short answer to the title question is that there are as many kinds of budget as there are ways to spend money. For a family, there is the household budget, the holiday budget, the recreation budget and if the kids are growing up, there is the school budget. For businesses, there are so many kinds of budgets that they have a whole profession called accountancy to address the budgets. For this article, we will just address family budgets.

Budgets are about tracking where your money comes from and where it goes. So the way to sort out a budget, is by when payday is. If you get paid bi-weekly, you may want to make your budget plan with 2 week intervals. One interesting facet of this is that you can take the first paycheck of every month and pay half of the bills and the second paycheck pays the other half. Then every 6 months, you have a paycheck that is free for catch up, vacation, saving or whatever focus you wish to have for it. It is a nice way to build some flexibility into your budget.

If you get paid monthly, things are pretty simple. You can book your income tight or you can make sure you have some flexibility built into your monthly spending package to deal with everything from contingencies to emergencies. If you get paid twice per month, the structure of your budget becomes what bills get paid in what order in the month. Some get paid in the first half of the month and the other half get paid at the beginning/end of the month.

No matter how you get paid, you need to address how you spend your annual income. So you string 52 bi-weekly budgets or 24 bi-monthly budgets or 12 monthly budgets together to figure out how some of those annual bills like property taxes and car insurance get paid. You have to look at each and all of these budgets that apply to your household finances, in order to figure out whether your budget has positive cash flow on a sustained rate. A non-negotiable budgetary goal is to have positive long term cash flow. You can suffer for a month or three, but if you have negative cash flow on an annual basis you have to take corrective action. That means you have to make more money and spend less.

So this is why you need to have two more kinds of budget for household financial planning. You need a "Planning Budget" and a "Reality Budget". In your planning budget, you need to look forward and project your income and spending for the year ahead. Do this on your usual pay period budget and on the projected annual budget. Your Planning Budget should always have positive cash flow. Your reality budget looks back and makes sure that you stayed within the goal of executing your plan of spending less than you made over the past year.

The more you do your budgets, the less you have to do them. Let me explain this contradiction. A budget is a tool to teach you how to set boundaries on your spending. Once you have done your budgets, those spending boundaries are built into your memory. You will find that intuitively you will know when you are spending too much on some facet of your budget. You will know when to stop or if you do not stop, you have a psychological problem that you must deal with. As you gain control of this facet of your budget, you will have to revisit writing it all out less and less. After a few years, you will write out your budgets, as a matter of financial maintenance once or twice per year.

Financial Tools and Coaching
A collection of tools for family financial management