Smart Budgeting Tips: Steps to Take Control of Your Finances
Overview
Budgeting is the cornerstone of financial stability and success. It is the process of creating a plan for how you will spend and manage your money. Effective budgeting involves understanding your income, expenses, and financial goals, then allocating resources accordingly to ensure you meet your objectives while also building wealth and security for the future. In this article by Academic Block, we will learn the intricacies of budgeting, from the fundamentals to advanced strategies, to help you master the art and science of financial management.
Understanding the Basics of Budgeting
At its core, budgeting is about balance. It requires a clear understanding of your financial situation, including your sources of income, regular expenses, and any savings or investment goals you may have. The first step in creating a budget is to gather all relevant financial information, such as pay stubs, bank statements, bills, and receipts. This data will provide a comprehensive picture of your financial inflows and outflows.
Once you have gathered your financial information, the next step is to categorize your expenses. Common expense categories include housing (rent or mortgage payments), utilities (electricity, water, gas), transportation (car payments, fuel, insurance), groceries, healthcare, entertainment, debt payments (credit cards, loans), savings, and investments. Categorizing your expenses allows you to see where your money is going and identify areas where you can potentially reduce spending or reallocate resources.
Setting Financial Goals
An essential component of budgeting is setting financial goals. These goals provide a roadmap for your financial journey and serve as benchmarks for measuring progress. Financial goals can be short-term, such as saving for a vacation or paying off credit card debt, or long-term, such as buying a home, saving for retirement, or starting a business. It's important to set realistic and achievable goals based on your income, expenses, and priorities.
When setting financial goals, consider the SMART criteria:
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Specific: Clearly define what you want to achieve.
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Measurable: Set quantifiable targets to track progress.
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Achievable: Ensure your goals are realistic given your current financial situation.
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Relevant: Align your goals with your values and priorities.
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Time-bound: Set deadlines or milestones to keep yourself accountable.
Key Components of an Effective Budget
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Income: The first step in budgeting is identifying and documenting all sources of income. This includes salaries, wages, bonuses, rental income, dividends, and any other forms of revenue. Accurate income tracking forms the foundation of a realistic budget.
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Expenses: Expenses encompass all regular and occasional expenditures incurred by individuals or businesses. These may include rent or mortgage payments, utilities, groceries, transportation, insurance premiums, entertainment, and discretionary spending. Categorizing expenses helps in analyzing spending patterns and identifying areas for cost optimization.
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Savings and Investments: Incorporating savings and investment goals into the budget is crucial for long-term financial growth. Allocate a portion of income toward savings accounts, retirement plans, stocks, bonds, mutual funds, or other investment vehicles based on risk tolerance and financial objectives.
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Debt Repayment: If there are outstanding debts such as loans or credit card balances, budgeting should include provisions for timely repayment. Prioritize high-interest debts while maintaining minimum payments on other obligations to reduce overall debt burden efficiently.
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Emergency Fund: Allocate a portion of income toward building an emergency fund equivalent to at least three to six months' worth of living expenses. This reserve provides financial security and peace of mind during unforeseen circumstances or economic downturns.
The Importance of Planning and Budgeting
Planning and budgeting go hand in hand to create a solid foundation for your financial health. The importance of budgeting cannot be overstated, as it offers several benefits:
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Helps You Control Your Spending Budgeting allows you to track your income and expenses, ensuring you do not spend more than you earn. When you know exactly where your money goes, it becomes easier to cut back on unnecessary expenses.
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Provides Financial Clarity Without a budget, it’s easy to lose track of your financial situation. A budget gives you a clear picture of your income, expenses, and savings goals. It makes it easier to see where your money is coming from and where it is going, giving you more control over your finances.
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Promotes Saving and Investment One of the main goals of budgeting is to ensure that you have enough money to save for the future. By planning ahead, you can set aside a portion of your income for savings or investments. Over time, these savings can help you achieve significant financial milestones, like buying a home or building an emergency fund.
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Helps You Avoid Debt A well-structured budget helps you live within your means and prevents you from borrowing excessively. With proper planning, you can make sure that you have enough money to cover your monthly bills without relying on credit cards or loans, which can lead to debt.
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Helps You Achieve Financial Goals Whether you're saving for a vacation, building an emergency fund, or paying off loans, budgeting is essential in achieving financial goals. With a budget, you can allocate money toward your goals and track your progress.
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Reduces Financial Stress Living without a clear financial plan can cause stress and anxiety. By sticking to a budget, you take control of your money and reduce uncertainty about how to handle unexpected expenses. Knowing that you have planned for different scenarios helps alleviate financial stress.
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Improves Your Financial Decision Making By reviewing your budget regularly, you become more aware of your spending habits. This awareness can help you make better financial decisions in the future, such as whether to make a big purchase or save for the long term.
Creating a Budget Plan
With a clear understanding of your financial situation and goals, you can begin creating a budget plan. Start by listing your total monthly income from all sources, including salaries, bonuses, freelance work, rental income, or any other sources of revenue. Next, subtract your fixed expenses, such as rent/mortgage, utilities, insurance premiums, and loan payments. The remaining amount represents your discretionary income, which can be allocated to variable expenses, savings, and investments.
Variable expenses are those that can fluctuate from month to month, such as groceries, dining out, entertainment, shopping, and travel. It's important to allocate a reasonable amount to these expenses while ensuring they don't exceed your discretionary income. Consider using budgeting tools or apps to track and categorize your expenses automatically, making it easier to stay within budget and identify spending patterns.
Prioritizing Savings and Investments
One of the key principles of budgeting is paying yourself first. This means prioritizing savings and investments before allocating funds to discretionary expenses. Aim to save at least 10-20% of your income each month, building an emergency fund to cover unexpected expenses and creating a foundation for future financial growth. Automate your savings by setting up regular transfers to a savings account or investment portfolio, taking advantage of compounding interest and dollar-cost averaging.
In addition to saving, consider investing as a way to grow your wealth over time. Explore different investment options based on your risk tolerance, financial goals, and time horizon. Common investment vehicles include stocks, bonds, mutual funds, exchange-traded funds (ETFs), real estate, and retirement accounts such as 401(k)s or IRAs. Diversify your investment portfolio to reduce risk and maximize potential returns, seeking professional advice if needed to make informed investment decisions.
Monitoring and Adjusting Your Budget
A budget is not a static document; it requires regular monitoring and adjustments to reflect changes in your financial situation or goals. Set aside time each month to review your budget, comparing actual expenses to budgeted amounts and identifying any discrepancies or areas of overspending. Use this information to make informed decisions about where to cut back or reallocate resources to stay on track with your financial goals.
Be flexible and adaptable with your budget, especially during life changes such as job transitions, income fluctuations, or unexpected expenses. Consider creating contingency plans or adjusting your budget categories as needed to accommodate changing circumstances. The goal is to maintain financial discipline while also being responsive to evolving needs and priorities.
Advanced Budgeting Strategies
As you gain experience with budgeting, you can explore advanced strategies to optimize your financial management and maximize efficiency. These strategies include:
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Zero based budgeting: Assign every dollar of income a specific purpose, whether it's expenses, savings, or investments, leaving no money unallocated. This method encourages intentional spending and eliminates wastefulness.
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Cash flow forecasting: Project your future income and expenses based on historical data and anticipated changes, helping you anticipate cash flow gaps or surpluses and make proactive financial decisions.
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Debt repayment strategies: Prioritize high-interest debts for accelerated repayment while maintaining minimum payments on other debts, such as the debt snowball or debt avalanche method.
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Tax planning: Maximize tax efficiency by taking advantage of deductions, credits, retirement contributions, and tax-advantaged investment accounts, reducing your overall tax liability.
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Lifestyle adjustments: Evaluate your spending habits and consider lifestyle adjustments, such as downsizing housing, reducing discretionary expenses, or exploring alternative income streams, to align with your financial goals.
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Regular financial check-ins: Schedule quarterly or annual reviews of your financial progress, reassessing goals, adjusting strategies, and celebrating milestones to stay motivated and accountable.
By incorporating these advanced budgeting strategies into your financial management approach, you can optimize your resources, reduce financial stress, and achieve greater long-term financial stability and success.
Budgeting Tips for Beginners
Now that we understand the importance of budgeting, it’s time to explore some practical budgeting tips for beginners. If you’re new to budgeting, don’t worry! Here are some easy steps to help you get started:
Track Your Spending: Before creating a budget, it’s essential to understand where your money is going. For at least a month, track all your income and expenses. Use a notebook, spreadsheet, or budgeting app to record everything, including small purchases like coffee or snacks. This will give you a clear picture of your spending habits.
Identify Your Income Sources: Make a list of all your sources of income, such as your salary, freelance work, investments, or side gigs. Be sure to include your net income (after taxes) rather than your gross income so that you can work with the amount you actually take home.
Categorize Your Expenses: Divide your expenses into fixed and variable categories. Fixed expenses include rent, utilities, insurance, and loan payments, while variable expenses include groceries, entertainment, dining out, and other lifestyle costs. Categorizing your expenses will help you identify areas where you can cut back.
Set Realistic Financial Goals: Setting clear and realistic financial goals is essential for staying motivated with your budget. Whether your goal is to pay off debt, build an emergency fund, or save for a vacation, having a specific target in mind will keep you focused. Break your goals down into smaller, achievable steps so that you can track your progress over time.
Create a Budgeting Method: There are several methods you can use to create your budget. Here are three popular budgeting methods for beginners:
- 50/30/20 Rule: This method involves allocating 50% of your income to necessities (e.g., rent, utilities), 30% to discretionary spending (e.g., entertainment, dining), and 20% to savings and debt repayment.
- Envelope System: This system involves using physical envelopes or digital ones to allocate a set amount of money to different categories. Once the money in an envelope is gone, you cannot spend any more in that category for the month.
- Zero-Based Budgeting: With this method, you allocate every dollar of your income to specific expenses or savings, making your income minus expenses equal to zero. This method ensures that every dollar is accounted for and helps you prioritize your spending.
Cut Back on Unnecessary Expenses: Review your spending habits and identify areas where you can cut back. Are you spending too much on takeout or subscriptions? Reducing these non-essential expenses can free up more money for savings or paying off debt. Small changes in your daily habits can add up over time.
Build an Emergency Fund: Having an emergency fund is an essential part of financial planning. Set aside a portion of your budget for unexpected expenses, such as medical bills or car repairs. Aim to save at least three to six months’ worth of living expenses, but start small and work your way up.
Automate Savings: One of the easiest ways to stick to your budget is to automate your savings. Set up automatic transfers from your checking account to your savings account each payday. This way, you pay yourself first before spending money on other expenses.
Review Your Budget Regularly: Your financial situation may change over time, so it’s important to review and adjust your budget regularly. If you get a raise, start a new job, or have new expenses, update your budget to reflect these changes. Periodically reviewing your budget helps you stay on track toward your financial goals.
Use Budgeting Apps and Tools: Technology can make budgeting easier and more efficient. There are many apps available that help you track your income and expenses, set goals, and create a budget. Some popular budgeting apps include Mint, YNAB (You Need a Budget), and PocketGuard. Choose an app that suits your needs and helps you stay organized.
Avoid Impulse Buying: Impulse buying can quickly derail your budget. To avoid making unplanned purchases, try waiting 24 hours before buying something non-essential. This gives you time to consider whether it’s a need or just a want. You can also use lists when shopping to stick to what you truly need.
Avoid High-Interest Debt: Credit card debt can be a major obstacle to budgeting and saving. Try to avoid carrying high-interest debt, as it can quickly add up and take a large portion of your income. Pay off high-interest debt as quickly as possible and avoid using credit cards unless absolutely necessary.
Celebrate Your Progress: Don’t forget to celebrate small victories along the way. Whether you’ve saved enough for an emergency fund or successfully paid off a credit card, acknowledge your achievements. Celebrating your progress will keep you motivated to continue working toward your long-term financial goals.
Tools for Effective Budgeting
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Budgeting Apps: Numerous budgeting apps such as Mint, YNAB (You Need A Budget), and Personal Capital offer features for expense tracking, goal setting, budget customization, and financial insights. Choose an app that aligns with your budgeting preferences and financial goals.
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Spreadsheet Templates: Excel or Google Sheets templates provide customizable budgeting frameworks for tracking income, expenses, savings, and debt repayment. These templates offer flexibility and detailed analysis capabilities for informed financial decision-making.
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Financial Software: Sophisticated financial software like Quicken or QuickBooks caters to individuals and businesses with advanced budgeting, accounting, and reporting functionalities. These tools streamline financial management processes and provide comprehensive insights into financial health.
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Online Calculators: Utilize online calculators for budgeting, debt payoff, savings goals, retirement planning, and investment analysis. These calculators offer quick calculations and projections based on input parameters, aiding in financial planning and decision-making.
Final Words
Budgeting is a powerful tool for achieving financial stability, building wealth, and realizing your financial dreams. By understanding the basics of budgeting, setting clear financial goals, creating a budget plan, prioritizing savings and investments, monitoring and adjusting your budget, and exploring advanced budgeting strategies, you can take control of your finances and create a secure financial future.
In this article by Academic Block we have learned that budgeting is a journey, not a destination. It requires discipline, patience, and ongoing commitment to financial responsibility. Embrace the process, learn from your experiences, and adapt as needed to navigate life's financial challenges and opportunities. With dedication and strategic planning, you can master the art and science of budgeting and unlock the doors to financial freedom and prosperity. Please provide your comments below, it will help us in improving this article. Thanks for Reading!
This Article will answer your questions like:
Budgeting is the process of planning and managing income and expenses over a specific period. It involves tracking spending, setting financial goals, and prioritizing necessary expenses. Effective budgeting helps individuals or organizations avoid overspending, achieve financial stability, and save for future goals. The key is to ensure that expenses do not exceed income while managing debt and savings efficiently.
To create a budget plan, start by tracking all sources of income. Then list all expenses, both fixed (e.g., rent, utilities) and variable (e.g., groceries, entertainment). Prioritize essential expenses and allocate funds for savings and debt repayment. Regularly review and adjust the budget as income and expenses change to ensure financial goals are met.
The primary purposes of a budget are to manage finances effectively, avoid overspending, save for future goals, and track progress. It helps allocate resources for necessary expenses while allowing flexibility for discretionary spending. Budgeting also aids in identifying areas where spending can be reduced and helps achieve long-term financial security.
Common types of budgets include fixed, flexible, zero-based, and incremental budgets. A fixed budget allocates a set amount for each expense, while a flexible budget adjusts based on income changes. A zero-based budget starts from scratch every period, allocating all income to specific expenses. Incremental budgeting builds upon previous budgets with small adjustments.
Zero-based budgeting is a method where every dollar of income is assigned to an expense or savings goal. At the start of each budgeting period, all expenses are justified and allocated, rather than rolling over last period's budget. This approach ensures that all spending is purposeful and aligned with financial priorities, promoting efficient resource allocation.
Budgeting provides several benefits, such as financial control, reduced stress, and improved savings. It helps individuals or businesses track spending, eliminate unnecessary expenses, and plan for future goals. Additionally, budgeting fosters discipline, reduces debt, and enhances financial security by ensuring that income is allocated efficiently across various needs.
Planning involves setting goals and creating strategies for achieving them, whereas budgeting focuses on allocating resources to achieve those goals within a specific time frame. Budgeting is a financial tool that supports the execution of a plan, ensuring that available resources are used efficiently and that spending aligns with financial objectives.
The best way to save money is to set specific savings goals, automate savings by setting up recurring transfers, and reduce unnecessary expenses. It's important to prioritize saving before spending by paying yourself first. Cutting back on discretionary spending, eliminating debt, and using high-yield savings accounts are also effective strategies for growing savings.
Budgeting tools and software help individuals and businesses track income, expenses, and financial goals. Popular tools include Mint, YNAB (You Need a Budget), and EveryDollar. These platforms offer features such as automatic expense categorization, financial goal tracking, and report generation, making it easier to stay on top of finances and maintain a balanced budget.
To make a budget, start by tracking your monthly income and categorizing your expenses. Allocate a set amount for fixed costs (e.g., rent, utilities), then assign funds to variable expenses (e.g., groceries, entertainment). Prioritize saving and debt repayment before discretionary spending. Regularly review and adjust the budget to ensure you are on track with your financial goals.
For beginners, start by tracking your income and expenses. Categorize spending into fixed and variable costs, then set realistic savings goals. Use budgeting tools to simplify the process. Start small by focusing on reducing unnecessary spending, prioritizing savings, and reviewing your budget regularly. Over time, adjust the budget as your income or expenses change.
YNAB (You Need a Budget) is a popular budgeting software designed to help users allocate every dollar to specific categories and plan for future expenses. While YNAB is highly effective in promoting financial discipline, its drawbacks include a subscription fee and a steeper learning curve compared to simpler budgeting tools. However, the software's emphasis on proactive budgeting can help users gain more control over their finances.
The 50/30/20 budget rule is a simple guideline for managing personal finances. It suggests allocating 50% of your income to needs (e.g., rent, bills), 30% to wants (e.g., dining out, entertainment), and 20% to savings or debt repayment. This rule provides a balanced approach to budgeting, ensuring financial stability while still allowing room for discretionary spending.
To create a 50/30/20 budget, begin by calculating your total monthly income. Allocate 50% to essential expenses like housing, utilities, and transportation. Use 30% for discretionary expenses such as entertainment and dining out. Lastly, dedicate 20% to savings or debt repayment. Adjust categories as needed to align with your financial priorities and goals.
Creating a budget is essential for personal financial health. It helps you track income and expenses, avoid overspending, and ensure you're saving for future goals. A well-crafted budget offers clarity on your financial situation, reduces stress, and fosters better decision-making, ultimately helping you achieve long-term financial stability and independence.
EveryDollar is a budgeting tool created by financial expert Dave Ramsey. It helps users create a monthly budget by allocating every dollar of income to a specific category. The app simplifies budgeting by tracking expenses, offering financial advice, and encouraging users to stay on track with their savings and debt repayment goals.
Risk and Challenges associated with Budgeting
Overestimating Income: One common risk is overestimating income, leading to unrealistic budget projections. This can result in budget shortfalls, difficulty meeting financial obligations, and reliance on credit or loans to cover expenses.
Underestimating Expenses: Conversely, underestimating expenses can lead to budget deficits and financial strain. Unexpected or overlooked expenses, such as emergencies, repairs, or inflation, can disrupt budget plans and strain financial resources.
Inaccurate Assumptions: Budgets are based on assumptions about future income, expenses, and economic conditions. Inaccurate assumptions, such as market trends, interest rates, or consumer behavior, can impact budget accuracy and financial planning.
Failure to Account for Risks: Budgets may overlook potential risks, such as market volatility, regulatory changes, geopolitical events, or natural disasters. Failure to account for risks can leave budgets vulnerable to financial shocks and disruptions.
Inadequate Monitoring and Review: Without regular monitoring and review, budgets may become outdated or irrelevant. Inadequate oversight can lead to budget variances, missed targets, and difficulty achieving financial goals.
Dependency on Historical Data: Budgeting based solely on historical data may not account for future trends, market shifts, or industry changes. Dependency on past data can limit budget foresight and strategic planning.
Budgeting Bias: Budgeting decisions influenced by personal biases, optimistic assumptions, or unrealistic expectations can lead to biased budget allocations, misallocation of resources, and suboptimal financial outcomes.
Different Type of Budgets
Operating Budget: A detailed budget that outlines the day-to-day expenses and revenues of an organization or business, typically for a specific period (e.g., monthly, quarterly, annually).
Capital Budget: A budget that focuses on major investments in assets such as equipment, machinery, buildings, and infrastructure. It typically covers longer timeframes and involves larger financial commitments.
Cash Budget: A budget that tracks the inflows and outflows of cash, helping to manage liquidity, forecast cash needs, and ensure adequate cash reserves for operations.
Master Budget: An overall budget that integrates all individual budgets (e.g., operating, capital, cash) into a comprehensive financial plan for an organization or business.
Flexible Budget: A budget that adjusts based on changes in activity levels or production volumes, allowing for variations in expenses and revenues while maintaining financial control.
Zero Based Budgeting: A budgeting approach where expenses must be justified for each budgeting period, starting from zero. It encourages cost efficiency and requires departments to justify all expenditures.
Incremental Budget: A budgeting method that uses past budgets as a baseline, incrementally adjusting figures based on expected changes or inflation rates. It is often used for stable or predictable expenses.
Static Budget: A fixed budget based on a set level of activity or production, typically used for short-term planning and not adjusted for changes in activity levels.
Personal Budget: A budget designed for individuals or households to track income, expenses, savings, and financial goals, helping to manage personal finances effectively.
Facts on Budgeting
Financial Planning: Budgeting is a crucial aspect of financial planning, helping individuals and organizations allocate resources effectively, set financial goals, and track expenses.
Income and Expenses: A budget outlines expected income sources and categorizes expenses, including fixed costs (e.g., rent, loan payments) and variable costs (e.g., groceries, entertainment).
Emergency Funds: Budgeting often includes setting aside funds for emergencies or unexpected expenses, providing a financial safety net during challenging times.
Debt Management: Budgets can help manage debt by allocating funds for debt repayment, identifying areas for cost-cutting, and avoiding overspending.
Savings Goals: Budgets allow individuals to allocate funds towards savings goals, such as retirement savings, buying a home, or funding education.
Tracking Financial Health: Regularly reviewing and updating budgets helps track financial health, identify spending patterns, and make informed financial decisions.
Budgeting Tools: Various tools and resources, such as budgeting apps, spreadsheets, and financial planners, can assist in creating and managing budgets effectively.
Financial Discipline: Budgeting promotes financial discipline by encouraging responsible spending, prioritizing needs over wants, and avoiding impulsive purchases.
Flexibility: A well-designed budget allows for flexibility to adjust spending based on changing circumstances, income fluctuations, or unexpected expenses.
Long-Term Financial Success: Consistent budgeting habits contribute to long-term financial success, wealth accumulation, and achieving financial goals.
Academic References on Budgeting
- Bragg, S. M. (2019). Budgeting Basics and Beyond (4th ed.). Wiley.
- Horngren, C. T., Datar, S. M., & Rajan, M. V. (2018). Cost Accounting: A Managerial Emphasis (16th ed.). Pearson.
- Kaplan, R. S., & Anderson, S. R. (2007). Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits. Harvard Business Press.
- Lynch, R. L., & Cross, K. F. (2017). Measure What Matters: Online Tools for Understanding Customers, Social Media, Engagement, and Key Relationships. Pearson FT Press.
- Luft, J. L. (1997). Activity-Based Management and Tactical Decision Making. Journal of Management Accounting Research, 9(1), 47-63.
- Maher, M. W., & Stickney, C. P. (2017). Budgeting Basics and Beyond (5th ed.). Cengage Learning.
- Morlidge, S., & Player, S. (2019). Beyond Performance Management: Why, When, and How to Use 40 Tools and Best Practices for Superior Business Performance. Wiley.
- Neely, A. D., Adams, C., & Kennerley, M. (2002). The Performance Prism: The Scorecard for Measuring and Managing Business Success. Financial Times Prentice Hall.
- Robb, A. M. (2017). Strategic Planning for Dummies. John Wiley & Sons.
- Shields, J. (2019). Managing Employee Performance and Reward: Concepts, Practices, Strategies. Cambridge University Press.