Top-Down Versus Bottom-Up Finances

Let’s start off by looking at what I mean by “top-down” versus “bottom-up.”

A “top-down” approach to something means you take something large and break it down into smaller pieces. For example, if you’re making a meal, you would be taking a “top-down” approach if you walked into the kitchen with a specific recipe already in mind and then you went about finding the ingredients.

A “bottom-up” approach, on the other hand, means that you take the elements you have on hand and see how they combine together into something greater. To continue that meal example, you’d be taking a “bottom-up” approach if you opened up your pantry door without anything other than the vague notion of meal preparation in mind, pulled out a bunch of ingredients that seemed like they might go well together, and then used them to construct a meal.

Both of these approaches work in different aspects of life. There are times when I go into the kitchen with a recipe in mind. At other times, I just open up the pantry door and see what I can throw together.

How does this relate to finances, though?

I view “top-down” personal finance as being oriented toward a long-term goal. Let’s say you want to be retired with 80% of your income at age 65. What do you need to do in your life to achieve that goal? You start breaking down that big, singular goal into smaller pieces, such as contributing a larger amount to your retirement plan.

On the other hand, “bottom-up” personal finance means that you focus on optimizing all of the little things so that you’ll have resources available for whatever life might throw at you. You don’t really have a big goal in mind, but you know that something will eventually come along and require you to be in good financial shape to take advantage of it, so you minimize your spending and save carefully.

Different people will thrive with these two different approaches.

For example, I’m strongly a “top-down” type of person when it comes to personal finance. I am motivated by having a big goal that I’m working towards and I love putting the pieces together to make that goal happen.

On the other hand, one of my closest friends is clearly a “bottom-up” kind of person when it comes to his money. He doesn’t have any major goals for the future, but he prides himself on finding ways to spend less right now so that whatever comes down the road is easy to handle. Not too long ago, he wrote a check for a house seemingly on a whim because he saw a great deal on one. It wasn’t planned out or plotted – it was just an opportunity that he had the resources to handle.

What I’ve found is that these two ways of thinking really appeal to different people. Some will absolutely migrate to one or the other.

On the flip side of that, I’ve also found that if someone hasn’t really found that approach that makes sense for them, it’s hard to really succeed at personal finance. I tried very hard to approach things from a “bottom-up” perspective, but I never really found the motivation to make little changes without an overarching goal. On the other hand, my close friend has told me that the thought of enormous goals makes him feel as though he’s destined to fail because the mountain seems so immense.

Some people simply find joy in the maximizing of the small details, regardless of where the benefits of that lead. Others, like myself, find that working toward a big goal really works best for them.

If you’re finding difficulty making personal finance click for you, ask yourself whether a “top-down” or a “bottom-up” approach fits you better. Are you more into the establishment of a goal and planning for that goal? Or do you find more value in improving specific aspects of your day-to-day life? There is no right answer, just a path to a better approach for you.

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