A rollover budget is when the budget category totals rollover into the next month. This means you could start the month in the negative if you have overspent by quite a bit, or start with the positive if you underspent. Many people use a rollover budget because it allows them to plan ahead for expenses and evens out costs for the entire year.
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A rollover budget is easy to use. When the new month begins you roll the category amounts into the next month's budget amounts. If you have extra money in a category you add it to the next month's category amount. If you have a negative amount, then you subtract it from that category's amount. Track the budget the way you would with a normal budget and rollover the categories through the next month. It is easy to monitor your savings goals when you use this type of budget. It may take a bit more time at the beginning of the month to set up your budget than another type of budget would require.
Rollover Budget Benefits
A rollover budget offers many advantages. It prevents you from going into debt because it is easy to spot areas where you have problems spending money, because the category will constantly be in the negative. It also makes it easy to divide your annual expenses and save for them each month. You can have a category for property taxes, and contribute to it each month, and you will be able to pay your taxes when the time comes.
One disadvantage of rollover budget is that it can be difficult to recover from a bad month. If you overspent for some reason, it can be difficult the next month to come out even because the money is already missing, and you may continuously roll over negative budget amounts. Another disadvantage may lead you to think you have extra funds in your account when looking at your budget. Budgets only reflect planned expenses, not actual ones. Regularly compare planned expenses to actual to adjust the rollover budget where needed.
The best way to set up a rollover budget begins with reviewing the expenses of the last year. Develop a budget based on those expenses, but include a percentage increase for items where the costs may go up. Evaluate each month's spending habits and plan accordingly. If you set aside funds in your budget that you do not use, rolling them over to the next month allows for unexpected expenses. Another way to deal with unexpected expenses is to include a contingency fund in your budgeting.