Activity based budgeting in business is different from the traditional method of budgeting, because you have to determine all the costs associated with every service you perform or product you make. After you determine those costs, you can create a budget based on all your business activities. The traditional method of budgeting requires you to compare last year's (or shorter period) budget and make adjustments as necessary. The costs for items is static and is often based on averages or industry standards. Activity based budgeting is a newer approach to business finances that might work just as well for your household budget. Here's how to apply this method in your personal finances:
List Household Activities
Break away from the traditional budget categories you're used to working with, and make a list of everything you do on a daily, weekly and monthly basis. Look at your family schedule and daily planner for helpful reminders. Don't edit your list as you write everything down. Also think about your spouse, children and/or other members of your household and add their activities. Enlist their help with this to simplify the process. A list might include:
- Run to the bank
- Monday visit to local deli
- Commute to job
- Surf the Internet
Figure out Costs
By now you've figured out that activity based budgeting is lengthy to set up, but it may be rewarding for personal financial planning. Figuring out costs is the longest activity in this budgeting process. Use receipts, bank statements and your experience to determine how much each activity costs. Here's an example of what that might look like, referring to the list above:
- Run to the bank: $5 auto fuel round trip
- Monday visit to local deli: $2 auto fuel round trip, $15 lunch, $3 tip
- Commute to job: $20 auto fuel round trip, $2 toll, $7.95 parking fees, $125 yearly car maintenance
- Surf the Internet: $55.25 monthly internet access bill including taxes, $49.95 yearly antivirus protection subscription
Calculate the total amount for all costs associated with each activity. Then, calculate the total amount of all activities combined.
You could take activity based budgeting for your household one step further by adding the cost of your time to each activity. For example, if your time is worth $15 per hour, figure out how long it takes you do each activity and add your cost of time to each activity. If you're self employed in a service industry, you already know your hourly rate. However, if you’re not self employed, it's harder to determine this amount. An easy approach is to figure out what you get paid per hour based on your current job. If you're not employed, but your spouse is, use that hourly rate. If you're not employed and there's no spouse's rate to use, go with what you think is reasonable based on your work history, skills and the market.