dividendThe story behind a top-down budget

Before marrying my wife, I’ll never forget our Minister counseling us about money and budgets. He quizzed us, “After charity, guess what my wife and my most important budget item is?” We guessed and guessed, but never could get the correct answer. He finally told us. “VACATIONS! For us, vacations are more important than houses, cars, or even savings, because vacations are where we build memories.” It was a surprising response, but really got me thinking.

By prioritizing his most important priorities first, our Minister was using a “top-down budget.” Once you’re comfortable with the big picture, you can deal with the details later. Too many of us try to budget “bottom-up” by looking at each expense from the past and placing it into a category. Bottom-up is exhausting and misses the bigger picture. Instead, work backwards. Here’s how to build a top-down budget.

For this example, let’s assume you have $75,000 available after you’ve paid required expenditures such as taxes, basic groceries, and health care.

Step 1: Create a list for the categories where you could direct your money.

Below are some examples:

  • Home mortgage or rent
  • Retirement savings
  • Travel
  • Large expenditures such as cars, boats, etc.
  • Nest egg/rainy day savings
  • Investing into stocks, real estate, or other
  • Charity
  • Entertainment such as concerts, movies, dining out, etc.
  • Shopping such as clothes, electronics, sports, gym memberships, etc.
Step 2: Prioritize these categories from most important to least important.

This is not supposed to be an easy exercise. Do the best you can knowing you can adjust your priorities later or change your mind. Here is my list:

  1. Travel
  2. Retirement savings
  3. Home mortgage or rent
  4. Charity
  5. Investing into stocks, real estate, other
  6. Entertainment such as concerts, movies, dining out, etc.
  7. Nest egg/rainy day savings
  8. Shopping such as clothes, electronics, sports, gym memberships, etc.
  9. Large expenditures such as cars, boats, etc.
Step 3: Assign percentages for each category — making sure they add up to 100%. Multiply the percentage times $75,000 to get to your top-down budget number.
Category % Budget
Travel 12% $9,000
Retirement Savings 10% $7,500
Home mortgage or rent 20% $15,000
Charity 10% $7,500
Investments into stocks, real estate, other 7% $5,250
Entertainment such as concerts, movies, dining out, etc. 10% $7,500
Nest egg/rainy day savings 6% $4,500
Shopping such as cloths, electronics, sports, gym memberships, etc. 10% $7,500
Miscellaneous 5% $3,750
Large expenditures such as cars, boats, repairs etc. 10% $7,500
Total 100% $75,000
Viola, you now have yourself a top-down budget. Here are a few things to keep in mind:
  • Just because you categorize something near the top of the list, doesn’t necessarily mean the category should have a higher percentage. Some categories are inherently more expensive. Categories near the top simply have higher priorities.
  • If your employer is matching your retirement savings, make sure you maximize what is matched. Always take advantage of free money!
  • Always include a miscellaneous/unexpected budget item of at least 5%. Unforeseen expenses inevitably come up!

George Washington once advised, “We must consult our means rather than our wishes.” And then Mick Jagger paraphrased George with, “You can’t always get what you want.” But with top-down budgeting, you can at least prioritize well. Good luck!