Overspending might occur if you do not have a clear understanding of how much money comes in each month and how much money is spent. And if you frequently spend more than you make, you may accumulate credit card debt, which can be difficult to repay.
So, if you find yourself pinching pennies at the end of the month, it may be time to examine your spending habits and alter (or build) your budget. Creating a budget that you can stick to may minimize the urge to Google “cheap meal ideas” every month. Let’s see how to create a line-item budget with an example and how to utilize it in our business and personal finance.
What is a Line Item Budget?
Depending on where you look, you can get a wide range of budgeting information and assistance. Some advocate the 50-20-30 guideline, while others swear by the envelope technique. While this can provide flexibility and a solid structure for your budget, if you’re searching for specific insights, it may be worth beginning with a different approach that provides more granular knowledge into your expenses and spending habits – a line item budget.
Line item budgets work by putting related items together and providing a well-organized flow of funds. They also track revenue and expenses, providing a more comprehensive and accurate financial picture.
What Constitutes a Line Item?
A line-item budget is, at its heart, a list of predicted income streams and pre-planned expenses for a certain time period. A line item is just one of the elements in the list. A line-item budget that calculates revenue from a paid job and a rental property, as well as expenses for a cell phone, car insurance, and a music subscription, for example, would have 5 line items. A line-item budget can have as few or as many line items as necessary, and they are frequently classified by category to assist keep the budget organized.
Characteristics
- A columnar depiction of spending is a line item budget. Several spending categories are displayed column-by-column, and each category can be compared to the previous year in a separate row.
- Several previous year columns can also be constructed to see whether the spending trend is rising or decreasing. If it is discovered that expenses for a given category are increasing year after year, this could be due to inflation in that category, which should be balanced by cutting expenses in other categories.
- Determine the budget for the current fiscal year in light of inflation and other economic conditions.
- Decide on a budget and fill in the column with a budget. Fill in the actual expenses when the month is through to see how far you varied from the predicted budget.
- Typically, it is prepared on a monthly basis. It assists managers in reducing spending when monthly budgets are significantly out of line with projections.
Personal Finance with a Line Item Budget
Small firms typically utilize line-item budgets to analyze and compare their earnings and expenses from year to year. They lend nicely to financial analysis, allowing business owners to readily pinpoint areas of their firm where they may be able to save costs – and where there may be room for growth.
While businesses have distinct demands than families or other personal budgets, there are times when making a line item budget can be beneficial in personal finances as well.
A line-item budget can help you manage your personal costs in the same way that it can help small businesses identify opportunities to grow or reduce expenses. Outlining each source of income and expense can reveal personal spending habits as well as chances for cost-cutting.
The specific insights you gain from a line item budget, as well as the modifications you make, will be determined by your own goals and overall financial circumstances.
Making a Decision on What to Include in a Line Item Budget
Making the decision to construct a line item budget is only the first step. Next, think about which categories are most crucial to include. A personal budget is, well, personal.
Everyone’s financial position is unique, so this isn’t a one-size-fits-all approach, but here are a few high-level areas to think about.
#1. Utilities and Bills
This topic is self-explanatory; after all, everyone has bills to pay, right? Water and power bills, cable, internet, or phone bills, and any other monthly expenditures on your spending list should all be listed in this area.
#2. Education
If you are presently enrolled in school or have children, you will most certainly want to include tuition and fees, the cost of books and other supplies, and any other expenses directly related to education costs.
#3. Entertainment
This one is a little broader and can be significantly adjusted based on individual spending habits. Do you have a streaming service subscription? Do you subscribe to a magazine on a yearly basis?
This category could also contain movie tickets, museum admission, or concert tickets. Depending on your hobbies and interests, you may discover that you can offer more detail.
#4. Fees
Keep track of any costs charged to your accounts. Is there a late fee for a credit card payment that is not made on time? What about ATM fees? Put them here. You might also include HOA fees and other costs in this area.
#5. Food
Depending on your eating habits, you might further divide this into groups such as shopping, snacks, and dining out.
#6. Home
Consider your rent or mortgage, as well as bills for home maintenance and upkeep.
#7. Medical
Medications, health, dental, or vision insurance, and co-pays are all examples of expenses that might be included in this category.
#8. Personal Hygiene
This category includes items such as toiletries, vitamins, and beauty products. Hair cuts, nail salon visits, and massages could also be included. You might also include the cost of other self-care habits, such as a membership to a meditation app or exercise classes if desired.
#9. Services
Do you have any regular services that you pay for? Depending on your budget, you may include dry cleaning, the cost of hiring a housekeeper, or the charge you pay your babysitter for a night out.
#10. Shopping
Are you going to the mall? Clothing and toys, as well as gifts for others, could be included in this category.
#11. Taxes
If you work full-time, keep track of the taxes deducted from your paycheck. Take note of quarterly taxes if you are a freelancer or independent contractor.
#12. Automobiles and transportation
This category includes things like your monthly metro pass, gas, car insurance, auto loan payment, and regular vehicle upkeep.
#13. Travel
Fill in the blanks with all of the expenses related to your next fantastic trip. Hotel or housing, air travel, taxis, travel insurance, and tickets and entrance for excursions and visiting the attractions are all examples of expenses.
If you’re going on a road trip, you may put the cost of gas and other car-related expenses in this section as well. The expense of food when travelling should also be considered.
#14. Income
You should probably mention all sources of income, not just your usual 9 to 5 job. If you’re budgeting as a pair, you can include both partners’ income. Include any money from side work or passive income opportunities as well.
#15. Investments
Contributions to all investment accounts, such as a 401(k), IRA, 529 funds, or other brokerage accounts, should be totalled.
The Benefits of a Line Item Budget
Line item budgets provide several advantages for organizations, especially because you don’t need financial experience to utilize and read them. Line-item budgeting provides decision-makers with a straightforward and systematic method to budgeting.
Budget decision-makers can use a line-item budget to make precise financial decisions, such as modifying funding levels based on the availability of funds for successfully running the firm or cutting costs based on changes in budgeting or organizational rules.
Here are some of the benefits of a line item budget:
#1. Simple to create
A line-item budget has the advantage of being relatively simple to create. Businesses do not need to rely on a finance department or an accounting agency to understand their expenses.
Businesses can request that departments develop their expenses using their own line-item budget.
For example, in a human resources department, they analyze the costs of employee benefits. Line item budgets for office supplies such as paper and pens can be created by office managers. Marketing professionals could create a budget line item for sponsorships and advertising. Each department can view a month’s worth of spending at a time and see how much money was spent on each line item.
#2. Simple to understand and apply
One of the reasons line item budgets are so popular, especially among individuals with little financial knowledge, is that they are straightforward to understand and analyze.
Throughout the year, you’ll be able to monitor how much money you’ve spent from the budget on each line item and forecast whether you’ll be on a budget, in surplus, or in deficit.
Molly, for example, has no financial experience. Her boss has instructed her to keep track of her expenses. Because line items are easily organized into categories, she can keep track of expenditures to ensure everything is accurately documented, and she can immediately assess how the department budget is performing.
#3. Make a budget.
Each organizational unit itemizes its costs and distributes a specific amount for each cost. Businesses use the budget from the previous fiscal period to create the budget for the next fiscal term. They can adjust prices to account for recurring discrepancies, regular contrasts, and inflation. Line item budgets give organizations verifiable data that illustrate patterns and openings for extra dollars and resources over time.
Construction companies, for example, with higher labour expenses throughout the spring and summer months can use information from the line-item budget to find ways to minimize labour costs during less busy seasons of the year.
#4. Make plans for the future
You’ll be able to forecast the future of the finances by comparing your current spending to the previous year’s expenditure for each line item and increasing or decreasing the money for each area based on the direction you see the firm taking with its finances in the following fiscal years. Because line-item finances are so transparent, they are straightforward to examine. Each line places and explains each expense in sequence.
For example, Jonathan is a marketing manager who has been requested by his employer to review his line-item budget to see if the marketing budget is sufficient for the next year and if it needs to be increased for the approaching fiscal year. He can compare prior and current year expenses by looking at the line items in their corresponding columns by year. The marketing manager can readily determine if his budget will cover the anticipated costs, which can assist him in planning for marketing efforts or inflation for the future year.
Line Item Budget Substitutes
Line item budgets, while straightforward and intuitive in nature, aren’t a great fit for everyone. However, there are numerous budgeting systems to choose from to meet the needs of each individual’s lifestyle. Among the most prevalent approaches are:
#1. 50/30/20
This method of budgeting, also known as a proportionate budget, divides money into three categories: needs, wants, and savings. Instead of making a list of expenses, you commit to spending 50 percent of your income on items you need, 30 percent on things you want, and the remaining 20 percent on savings. Because spending is not recorded at the granular level, spend tracking applications and services can be utilized to avoid overspending in any one category.
#2. Envelope Method
The envelope approach is using physical envelopes and identifying each one with a spending category such as food, bills, or amusement. The envelopes are then filled with the maximum amount of money that can be spent in each category, and spending occurs directly from those envelopes throughout the month. When an envelope is empty, no additional money may be spent in that category until it is withdrawn from another.
#3. Zero Sum
This method, like the line-item budget, accounts for all revenue and expenses. The difference is that the goal of this budget is to ensure that every incoming dollar is allocated to either a saving or a spending purpose, with nothing left over. Automating money with services such as automatic bill-pay and pre-scheduled bank transfers can aid in the management of this budgeting method.
Conclusion
The Line Item Budget is simple to create and maintain. Small firms that lack extensive accounting skills might use this budget to keep track of their monthly spending. Being over the budget does not always imply that costs have grown; it is possible that revenue has increased as a result of the extra expenditure. So keep this in mind whenever you make a decision based on Line Item Budget.
Line Item Budget FAQs
What is a line item example?
In a budget, an example of a line item is the cost of energy. noun. A single item, especially one with a separate sum, in a budget, appropriation bill, etc.
What is the primary purpose of line item budget?
The major goal of Line Item is to assist managers in controlling their spending. The comparison of historical and present spending statistics is always a caution indicator for managers.
What is the difference between line item budgeting and performance budgeting?
In a fundamental sense, a program Performance Budget differs from a Line-Item Budget. Salary, benefits, office supplies, travel, utilities, equipment, and so on are all listed as line items.
