Understanding Incremental Budgeting

Quote Understanding incremental budgeting

Incremental budgeting is a simple but systematic way to manage your finances. It works by taking last month’s budget and making small adjustments to match your current needs.

This approach is easy to use, which is why it’s a popular choice for people who want to manage their finances without pursuing complex budgeting strategies.

This method is worth trying if you have stable expenses and predictable income. Incremental budgets help you set realistic goals and keep spending in check, making them a great starting point for those who want a straightforward way to manage money.

Using a budgeting app, like Albert, can help keep the process simple, so you can focus on the financial basics and build a foundation for long-term success.

What is incremental budgeting?

Incremental budgeting is a practical approach to building your budget by making small changes to your existing budget.

Instead of starting from scratch, you use your previous budget as a foundation, adjusting it by a fixed percentage or amount to reflect changes in your income or expenses. It’s a simple way to stay on track with your finances without getting caught up in complicated strategies.

Definition and basic principles

At its core, incremental budgeting involves modifying a previous budget to fit a current situation. The key principles are simplicity, consistency, and flexibility.

It’s simple because you’re working with an existing budget, saving time and effort.

It’s consistent because it builds on your previous work, so you don’t have to reinvent the wheel every month or year.

And it’s flexible because small adjustments will help you keep up with changes in your income or expenses without overhauling everything.

For example, if you spent $500 on groceries last month and anticipate spending $50 more on this category in the coming month, you might up your grocery budget to $550. This small adjustment will help you stay on top of changes while keeping things manageable.

How incremental budgeting works

Adjustments to spending with incremental budgeting (2)

To use the incremental budgeting method, start by reviewing your previous budgets to see how you’ve been spending.

Identify any areas where your income or expenses have changed, then adjust those categories by a set percentage or amount.

The incremental budgeting process is straightforward and allows you to create a budget that fits your current financial needs without starting from scratch.

Advantages of incremental budgeting

Incremental budgeting has several key benefits, making it a great option for managing personal finances and works well for various financial goals. 

Simplicity

One of the biggest benefits of incremental budgeting is its simplicity by building off your existing budget.

This makes it quicker to set up and easier to maintain. It’s a great choice for anyone new to budgeting or if you want an easy way to stay on top of your finances. Less time spent on crunching numbers means more time managing your money effectively.

Stability and predictability

Incremental budgeting helps keep your finances stable by maintaining consistent spending habits. This predictability makes planning easier and supports steady progress toward savings goals.

You could also take advantage of Albert’s automatic budgeting feature to continually make progress without having to think about it. 

Encouragement of gradual change

This method encourages small, manageable changes over time, which can be easier to stick with. Gradual adjustments reduce your risk of financial stress and help you improve your habits at a comfortable pace.

For example, increasing your savings by just 1% each month might seem small, but it can add up significantly over time. Small changes can lead to big results without feeling overwhelming.

Disadvantages of incremental budgeting

While incremental budgeting has benefits, it’s also important to consider a few potential downsides. Knowing these can help you decide if this method fits your financial needs.

Change comes more slowly

Using your existing budget as a template could lead to missed opportunities. By sticking too closely to past budgets, you might overlook changes in your financial situation or new ways to save or invest.

While routines are helpful, they can also limit financial growth if you don’t regularly reevaluate your goals and strategies. It’s important to stay open to fresh approaches and be willing to make adjustments when circumstances change.

Potential for waste

If you continue to budget for expenses that are no longer necessary, you might end up wasting money. This can happen if you overestimate certain costs or forget to trim areas where spending has decreased.

Regularly reviewing and adjusting your budget categories as needed can help you avoid overspending and keep your finances efficient.

Another way to avoid this is to seek professional help from a financial expert. With Albert, you can get personalized advice on your budget and ask for help avoiding waste. 

Inflexibility in dynamic environments

Life and finances are both dynamic — things are bound to change. Significant changes, like a new job, a move, or major life events, may require a more flexible budgeting approach. 

Incremental budgeting doesn’t always adapt well to these shifts. Changes in income, unexpected expenses, or a big shift in the market might make you rethink your approach to budgeting. In these cases, a more dynamic method might be a better fit.

When to use incremental budgeting

Whether incremental budgeting is right for you depends on your financial situation and goals. Here’s when this method might be the best fit:

Best for predictable finances

Incremental budgeting is ideal if you have a stable income and consistent expenses and prefer a straightforward approach. It works well if your monthly earnings and spending don’t vary much, offering a clear way to stay on top of finances.

This approach can be an easy and effective way for college students or retirees with fixed incomes to manage money without extra hassle.

Incremental budgeting compared with other budgeting methods

Budgeting methods (2)

To decide if incremental budgeting is right for you, consider how it compares to other methods, like zero-based budgeting and the envelope system.

Zero-based budgeting requires justifying each expense from scratch, offering more control but requiring more time.

The envelope system involves setting cash aside for each spending category, giving you hands-on control of your spending.

Think about your lifestyle and the level of detail you want in your budget, and then choose the method that best suits your needs.

Steps to implement incremental budgeting

Implementing incremental budgeting is simple if you break it down into steps:

Review previous budgets

Start by reviewing your recent spending patterns. Gather any budgets, bank statements, and receipts you have on hand.

Notice where your money consistently goes monthly and understand your income stability. This review will help you make realistic adjustments based on your past habits and overall financial picture.

Using a budgeting app can be helpful here — you’ll be able to get a clear view of your spending over time. 

Adjust for inflation and growth

You will need to make small adjustments to your budget for inflation or income growth. For example, you might slightly increase your budget for essentials like groceries or utilities to account for rising costs.

If you’ve received a raise, consider boosting your savings or investment contributions by a small percentage.

A consistent approach, like a 3% increase, can help you keep pace with changes while working toward your financial goals.

Allocate resources for new goals and needs

Finally, make room in your budget for new goals or upcoming expenses, like education, travel, or buying a home.

By allocating resources to these goals, you’ll ensure that your budget reflects your current needs and future plans. Adjust other spending categories to accommodate these priorities and keep your finances balanced if necessary.

Real-world examples of incremental budgeting

Seeing incremental budgeting in practice can make it easier to apply to your own finances. Here are a few real-world scenarios:

  • Annual salary increase: If you receive a 5% salary bump, you could increase your spending or savings by a similar percentage. 

  • Adjusting for inflation: When living costs rise — say by 2% — you could adapt your grocery or utilities budgets to keep up with these changes and avoid surprises at the end of the month.

  • Planning for life events: Are you expecting a new family member? Gradually increase your healthcare and childcare budgets over several months to prepare without feeling the financial strain all at once.

Is incremental budgeting right for your financial journey?

Incremental budgeting is a simple, straightforward way to manage your personal finances. You can create a stable, consistent financial plan by building on your previous budget and making small, manageable tweaks. This approach is ideal if your income and expenses are predictable and you prefer an easy-to-follow budgeting method.

If your finances are more fluid, then a more flexible budgeting method might be a better fit. Consider what your personal financial goals look like to decide if incremental budgeting is right for you.

⚡️ Start your journey with Albert today to achieve your financial goals with confidence.

Frequently asked questions

What are zero-based budgeting and incremental budgeting?

Zero-based budgeting involves starting from scratch and justifying each expense, while incremental budgeting builds on the previous budget, making small adjustments.

What are 2 disadvantages of incremental budgeting?

One disadvantage is that it can lead to excess spending if unnecessary expenses are carried over. Another is that it may limit innovation since it relies heavily on past spending.

How to create an incremental budget?

To get started, gather data from your previous budget, make adjustments based on recent spending patterns, and track any changes as you go on.

What is a major feature of incremental budgeting?

Incremental budgeting typically involves small increases to your previous budget, offering a steady approach to financial planning.

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