One of the big challenges in creating a budget that’s actually useful is knowing how much detail to include. Some people believe you’ll need to write down every dollar you spend so that it’s as comprehensive as possible. However, this can quickly create a lot of random data, give you analysis fatigue, and make you more likely to abandon your efforts.
A better way would be to capture all that same data but format it in a way that shows which areas of your finances are on track and which aren’t. Thankfully, the small business world already has such a template that we can use with something called a line item budget.
What is a Line Item Budget?
A line item budget is a type of budget that groups expenses and income sources together by department or cost center. Arranging the finances in this way lets business managers know how much cash flow is passing through each cost center without going too far into detail.
Another helpful aspect of a line item budget is that they’re formatted to include information about the past, present, and future.
- The past tells us how much was spent or earned last month or year
- The present tells us where we are today
- The future is a projection of what this figure may be next month or year
Having these numbers available gives users the ability to make quick comparisons and spot trends that may need some attention. The forward projection is also helpful for anticipating what the overall budget should be so that actions can be taken now to accommodate them.
Line item budgets are popular among small and medium-sized businesses. This is because they are relatively simple to create and maintain.
Can a Line Item Budget Be Used at Home?
Absolutely! In the same way that each department within a business will have its own line item, your income and expenses can be formatted in the same way. Additionally, a line item budget will also serve as a good template for having past and future figures available so that you’re already looking for trends and anticipating your cash flow.
How to Create a Line Item Budget for Your Home
If you’d like to adopt a line item budget for your household finances, then here’s how you can get started.
1) List Your Expenses and Income
Begin by making a list of all your expenses for the year. This can be done by collecting past bills and bank statements. Take note that if you regularly use a credit card or debit card, you may have to comb through the transactions individually. Look back through at least three to six months’ worth of data.
Repeat this same process with your income sources. This may include any money that you’ve earned from:
- Your job
- Side hustles
- Investments
- Business income
- Assistance from another source
- Etc.
2) Group Your Expenses and Income
To make your budget into a line item budget, start clustering together expenses that are similar. For example, if you spent money on gas and an oil change in the same month, then this could fall under one line item category called “Transportation”.
Other possible line items could be:
- Housing
- Food
- Medical
- Utilities
- Insurance
- Services
- Entertainment
- Debts
- Savings
- Taxes
Again, repeat this same process for your income. For instance, if you’ve got more than one side hustle, then you could group them all together as one line called “Side Hustles”.
3) Populate Past and Current Data
With the line items established, the next step is to begin filling in how much each category was last year. If you’re making your budget on a monthly basis, then this will need to be filled out on a per-month basis.
While entering past data for each line item, continue forward into the current year. This should still be done even if it’s only the first month of the year.
4) Estimate Future Projections
Now that it’s known how much money was spent and received previously, you should make some forecasts about how much each line item will be going forward. Your projection could be:
- Similar to the amount recorded for last year
- Lower if you’d like to challenge yourself to spend less
- Higher if you’re certain to have higher expenses coming up this year
These projections should then be summed together to give you some indication of how much your total income and expenses will be for the year. This will be important because it will help you to anticipate if you’ll be in the green or red going forward.
5) Update Your Budget Regularly
The key to making a line item budget practical is to update it as often as possible. It will be helpful to do this regularly once a week so that it doesn’t become too big of a chore.
If you’re spending for each line item doesn’t seem to agree with your future projection or past data, then a closer look may be necessary. This could be an area where you’re spending more than normal, and adjustments may be necessary for other line items to compensate for the overage.
The nice thing about a line item budget is that the longer you maintain one, the more data you’ll have. Effectively, the present data you’re entering each week will become your past data for next year’s projections, and so on.
Disadvantages of a Line Item Budget
Line item budgets can be very effective for tracking expenses and detecting trends. However, they do require a lot of manual input. Especially at the beginning of the process, it takes a great deal of effort to collect past data and determine which line item they should be placed under.
As an alternative, a budgeting app like Buxfer can help you to categorize your purchases. This can be done by assigning each transaction to a specific type of category. The app will begin clustering these transactions together (effectively giving you a line item), and it will assign this same category automatically to future similar transactions.
To find out more about how you can categorize transactions with Buxfer, click here.
Featured image credit: Pexels
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