When Top-Down and Bottom-Up Budgeting Clash

In my observation, there are two totally reasonable approaches to budgeting:

  • top-down: decide where your money should go de novo without reference to your current spending i.e. percentage-based budgeting like the Balanced Money Formula (BMF)
  • bottom-up: observe where your money goes and create a budget reflecting that, perhaps with small tweaks


The bottom-up approach is the most straightforward for most people because, you know, they already have financial lives. They rent or have a mortgage, they eat, they pay relatively fixed utilities, and they have savings rates and debt repayments already set up. Perhaps they want to spend a bit less, so they track their spending and decide to cut back by 10 or 20% in some “want” categories to free up some cash for their goals. This doesn’t mean that they will get anywhere near an ideal budget for their lifestyle or meet their goals in a timely fashion. They are letting their circumstances dictate their long-term financial lives.


The top-down approach really seems to be the superior method in terms of lifetime financial planning and feeling confident that you are meeting your goals while having a balanced approach that lets you spend guilt-free within your limits. However, it seems to me that the only way to implement a top-down approach in one fell swoop is at a point of drastic transition, for instance when moving to a new city for a job or when moving to a new home just after getting married and combining finances. Another downside is that lifestyle inflation will occur with a percentage-based budget (though obviously not outpacing income). Realistically also a “universally applicable” percentage-based formula like the BMF does not take into account the common speed bumps of high cost-of-living cities, low incomes, and high debt, or even the personal variation of wanting to save more or pay off debt more aggressively.


But I think that we can nevertheless all strive for a top-down budget (tailored for each of our situations) even while starting with a bottom-up approach. (If you are at a transition point like becoming independent from your parents for the first time or finally getting a post-grad “real job,” take advantage and implement a top-down approach immediately!)


1. List your ideal top-down budget for your lifetime by percentages.


2. Develop a realistic top-down budget considering your balance sheet, where you live, and life stage. You may reference location-independent recommendations for giving (at least 10% for Christians, for example) and saving (at least 10-20% for the long-term, most likely), as well as your local market for housing prices and cost of living.


3. Write out a bottom-up budget if you don’t already have one (i.e. just track your spending and average it over a few months).


4. Note the points of discrepancy between your top-down and bottom-up budgets and brainstorm ways you can alter your spending and savings rates to match your top-down tailored budget. You may need to

  • move to a cheaper apartment or refinance your mortgage
  • upgrade your home to save on utilities
  • eat at home more


5. Implement your plan in a temporally appropriate fashion. Although I prefer overnight change to gradual change (though others disagree), not every type of change is possible overnight – you may need to wait out your lease or learn to cook. You may even realize that you have an income problem but don’t yet know how to make more money. But within a year, I’m sure that you can make great strides toward aligning if not completely align your bottom-up starting-point budget with your top-down budget. (If you have debt, you may need to make radical changes away from your ideal top-down budget to pay down debt more quickly so that you can eventually get closer to your top-down budget.)


In my post-college life, I started with a bottom-up approach, guided by some top-down recommendations for saving and debt load rates.  But since our wedding two years ago and our more recent move I feel that we’re now in a sweet top-down budget place, taking into consideration our (relatively) low incomes, that we live a flight away from most of our loved ones, and that we have no kids and a flexible lifestyle. Upon our next transition, we will probably have a slightly shifted top-down budget given a (most likely) higher cost-of-living area and more targeted savings goals like for a house down payment.


Has your approach to budgeting been top-down, bottom-up, or both? Do you now have a budget that meets your top-down ideals? What shifts are on your horizon to get close to your top-down budget?


photo from Free Digital Photos


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24 Responses to "When Top-Down and Bottom-Up Budgeting Clash"

  1. SWR says:

    I guess we’re bottom-up budgeters? We like to work on one goal at a time because of our tight budget and our hopes to get out of debt sooner rather than later.
    SWR recently posted..Made For You and Me

    1. Emily says:

      There is definitely a time to just be throwing everything possible at debt. Do you have an idea of a top-down budget that you’ll want for your life?

  2. My future self will be saving 50% of take-home pay and spending the rest on living. My current self puts everything above normal spending toward the student loan pile.
    Kathleen @ Frugal Portland recently posted..A very frugal giveaway

    1. Emily says:

      That’s clear! Are you above or below 50% toward debt right now?

  3. The problem I have with a top-down budget is it’s inherently arbitrary. I could easily create a budget that says that 30% of my expenses will be household related things like mortgage, lot rent, and utilities. That may sound like an appropriate number, but how well does it match up with what the costs and my income actually are? If I get a raise, does that mean I should subscribe to HBO to keep my spending at 30%?
    Edward Antrobus recently posted..Net Worth Update: September 2012

    1. Emily says:

      I agree with you, which is why I said it should be tailored to your income and geographic cost of living. What I’m trying to encourage is for people not to just settle for their bottom-up budget but to strive for one they think is long-term sustainable.

      I agree that the implied lifestyle inflation of a percentage-based budget is unnecessary. Our top-down budget sets ceilings on spending and minimums on savings, not the reverse! But should we want to upgrade our lifestyle within the agreed-upon percentage, I wouldn’t feel guilty about it as we are confident that we are meeting our other goals.

  4. I guess we are top down people…..
    We use a zero sum budget so that every dollar is accounted for! It works good for us, and that is all that matters!
    Holly@ClubThrifty recently posted..Working as an Employee…and Making the Best of It

    1. Emily says:

      First one I’ve heard from! Have you always worked top-down? I like to zero out every month as well.

      1. I guess that is just our natural way of doing things. We only get paid once per month (both of us) on the first of the month. So on the 1st we write our budget for the month- including regular expenses and any irregular expenses. At that point we transfer all additional funds to savings, investments, or mortgage prepayment. We try to intentionally spend every dollar so that there is nothing left.
        Holly@ClubThrifty recently posted..The VIP Club – Weekly Roundup 6th Edition

  5. Seth says:

    I suppose my wife and I (more I because I handle the finances)use a top down. I account for every dollar. After all bills are paid, I budget X amount of money that is spending and the rest of it goes to savings. I/we don’t set a minimum on spending but like you previously mentioned a ceiling. I/we have a minimum for saving, but usually end up putting more away. I have a column for percentages, but I don’t really follow those closely except for savings. As long as I am putting at least 20% each month, I feel we are headed in the right direction.

    1. Emily says:

      That long-term savings percentage is really the most critical one to hit. That’s great that you put your excess into savings as well. We put it into savings-for-spending. 🙂

  6. I guess we kind of did a little of both, for things like food and utilities where simply assigning a percentage doesn’t always work we worked bottom up. For things like investing we went top down otherwise we would never get to the level we wanted to be at.

    Everything is adjusted month-month as well, usually bottom up since prices of certain items are rising faster than our income. Food for example has gone up about 30% since the beginning of the year. Fortunately (I think) this is more a result of rising prices than expanding waistlines.

    I do agree with the idea of at least having some things based on a top down approach, especially saving, investing, and giving. Housing could possibly fall under this as well, if you don’t already have a house/mortgage, top down will give you a good number to stay at or below.

    A bottom up approach for giving would put us below the 10% mark but by setting aside money in a separate giving account in order to get to that mark we are forced to give even more. I personally enjoy this portion of giving far more than the automated monthly withdrawals, we’ve been able to give more one-time gifts to people or organizations than I think we would have by using a strictly bottom up approach.

    Good article.
    David@SkepticFinance recently posted..Are You Better Off Now?

    1. Emily says:

      Yeah, I think you can only use percentages for vital categories like food and utilities (as ceilings) if you make enough money / set the percentages high enough that you don’t need to exceed them.

      We’re definitely going to use the top-down approach when we determine what size mortgage we can take out. But even current homeowners can make a change by moving or refinancing.

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  9. Andrew says:

    I suppose we are a little of both. Though with our upcoming holiday it’s kind of all up in the air at the moment.

    1. Emily says:

      How does having an upcoming holiday change how you budget?

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