Guidelines vs. Strict Rules

• One of the areas in which budget concepts can vary is how strictly you must stick to them. Some people look at budgeting as simply a guideline that should be followed. These people think that you should stick to the budget as best as you can but that there is always room for variation. Others use a budget as a tool that should be followed to the letter. These individuals believe that you should not spend even a single dollar more than what you have budgeted for a spending category.
  
  

Spending Categories

• Some people believe that you should budget by setting specific spending categories and allocating a certain amount of money to each category. For example, the envelope budgeting strategy adheres to this principle. With envelope budgeting, you divide your spending up into several categories such as restaurants, groceries and entertainment. Then create an envelope for each category. When you are paid, you cash your paycheck and then allocate a certain amount of cash to each envelope. When you make a purchase, you take it out of the appropriate envelope. Once the money runs out, you cannot make any more purchases in that category until you are paid again.
  
  

Using Percentages

• Another approach to budgeting uses a percentage method based on how much you earn. With this approach, you allocate a certain percentage of your income to different categories. For example, one method aims to keep your essential spending to 60 percent of your income. By doing this, you can save more money and use some for entertainment or other expenses. Different budgets use different percentages, but the basic idea is the same. With this approach, you figure out how much you make and then allocate an appropriate percentage to each spending category.
  
  

Business Budgeting

• Some businesses use sales budgets as a way to forecast how much they will sell in a particular month or quarter. Based on this budget, the company can make decisions such as how much to invest in advertising and other areas of the company. They may also come up with production budgets to help determine how many materials to order.