CFO of Life #9 4 Advanced budgeting strategies to achieve your financial success

After looking into what a budget is and some basic approaches, it’s time to talk about more advanced strategies. These ones take significantly more time to create and maintain, but they can also save you a lot more money.

The most basic approach you can adopt is a simple back-of-the-napkin budget, which is a rough calculation of your income and expenses in a single month (Check out my article about budgeting 101).

When it comes to more advanced budgeting strategies, the difference comes from how the approach is ‘driven’. In general, these budgets fall into two categories – either bottom-up or top-down.

A top-down budgeting approach would ‘slice the pie’ into broad categories. Then each category would have the allocated budget further divided into smaller and smaller ‘sub-categories’. This is also how big corporations would split their budgets.?

*Example –? First, separate your budget into departments and then assess each team depending on their effectiveness

On the other hand, a bottom-up approach would focus on managing a specific metric/ KPI. And then control everything around it.

*Example – "I want to save/ invest 35% of my money"

Given this goal, you would go from there and work out how to build your budget around it.

1. Section by section

This type of budget focuses on category-specific spending. The aim is to allocate a % of your expenses into a category and closely monitor them. The motivation for this is that now much of your income will go into those categories based on the previous months and your goals.?

The advantage of this process is that it gives you an exact amount to spend per category and an explicit goal to strive towards.

The drawbacks are that if you happen to miss one or two category-specific allocations, you might abandon your budget.

2. Deep-dive

This is an even more advanced version of the previous approach. It comes as a deep-dive on another level. It focuses on taking the category-specific budget and then allocating it to each subcategory. This budgeting approach is best-suited for long-term planning.

*Example – Category: Food

Subcategory: Groceries, Restaurants, Takeout

The benefit of doing this is the additional depth of control over your spending.

The drawback is that it takes a lot more time to review and control your budget.

3. Kakeibo – the Japanese accounting system (the method I use)

This is one of the most thorough budgeting approaches that you can create before you reach the level of a fully-fledged accounting practice. It simply takes the above 2 systems and marries them together. On top of that, it adds expense tracking category by category!

The advantage is that if done correctly, you can easily get a grip on your spending and quickly achieve your goals.

The disadvantage is that it takes time and patience to get used to this budgeting approach.

4. Ratio-focused

This is one of the most advanced approaches you can follow. But if done correctly, it’s the most impactful one.

As the name gives a clue, this one relies on specific ratios. Those ratios depend on your current aim.

That requires significantly more planning and control, which can't be achieved without a solid understanding of your expenses.

That’s where the hard bits come into play. To succeed with this method, you would need to account for all of your expenses. Map out the historical performance of your metrics and add a well-grounded justification of why these metrics are important.

But if you get all of them correctly and you execute your strategy well, you will be set for success. You will effortlessly achieve the KPI you aim for.

I must be honest and warn you that setting up any of these budgeting strategies would take some time. It will take between a one-time commitment of 5-20 hours, but the more time you invest, the better it will turn out.

If I had to start again, I would go for method number 3 (the one I use). On the contrary, if you want to start budgeting, but don't have much time, the 50/30/20 approach would be the best way forward.

I hope you enjoy this series of articles on how to become the CFO of your Life and if you know someone who is struggling with their personal finance share this article with them.?

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All comments and topic suggestions are well-appreciated.?

#si #personalfinance (Post #9 in the series CFO of Life)