What is budgeting and why should you review your budget each month?
Budgeting is the process of creating a plan to allocate our money so you can meet your life goals. Creating a budget allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do.
In our last article, Budgeting: setting your directions, we discussed the importance of making a monthly budget. Now, we are looking at how to review your budget at the end of the month. It would be hard to get better at budgeting unless you compare your budget to what you actually spent.
Reviewing your budget on a monthly basis gives you an opportunity to determine how well you did financially according to your plan. During the budget review, you will see very easily where your money went; did you overspend somewhere or were you able to save somewhere else? Sitting down and figuring out why you spent the way you did is the true purpose and power of reviewing your budget. Life happens, it happens quickly and your review will shine light on why your financial performance was the way it happened.
Illustrative example: How to review your budget
We remember John and Jane Smith who together earn $70,000 of after-tax income from their employers. It is now the end of the month and John and Jane Smith are reviewing their budget. They have collected their receipts, credit card statements and bank records to find out where they spent their money.
The Smiths have added three columns to their prior month budget: actual expense ($), Difference, and Notes. Take a look below to see how they spent their money.
|Budget Category||% of after tax income||Annual budget amount
|Monthly budget amount
|Actual Expense ($)
(Column A minus
|Housing (mortgage/rent, property taxes, etc.)||25||17,500||1,459||1,200||259||Underspend as property tax was not paid.|
|Savings||5||3,500||292||0||292||Did not save because of Car repairs.|
|Investing||5||3,500||292||0||292||Did not invest because of car repairs.|
|Utilities||5||3,500||292||400||-108||Extreme heat, so we used the air conditioning a lot.|
|Transportation (parking/fuel/insurance)||10||7,000||582||550||32||Saved a little due to car pooling|
|5||3,500||292||200||92||Reduced club costs by $92/mth, so reducing this to $200/mth.|
|Debt Repayment||5||3,500||292||350||-58||Will take the extra from recreation and increase this by $92/mth.|
|Clothing||5||3,500||292||600||-308||Needed clothing for our trip.|
|Medical/Dental/Gym||5||3,500||292||500||-208||New bike for Jane.|
(Furniture, Charity, other)
|5||3,500||292||350||-58||Donation to niece’s school and furniture repair.|
|Cushion||10||7,000||582||1,000||-418||Car broke down and we needed repairs now.|
|TOTAL||100||70,000||5,833||6,301||-209||Overspent, but we have a plan to get back on track.|
Next month however, they will need to revise their budget to replenish their emergency fund. The cushion, savings, and investing expense categories will be more than enough to replenish the fund next month and they’ll still have additional money to pay down their debt.Overall the Smiths spent $209 more than they earned last month. Not the easiest budgeting start, but thank goodness for that $1,000 emergency fund that helped pay for the unexpected car expense while still keeping some cash in their savings account.
So, while it was a rocky start, they are still on a great path to improving their financial position for next month!
Reasons to love your monthly budget review
- Being in control of your finances and spending less than you make is liberating and some believe this is one secret to greater happiness.
- Reviewing your budget is a fun way to learn about yourself and what joy you get out of life. Nobody wants a lack of money to be the reason you can’t head out with your friends or take that very needed weekend getaway. Reviewing your budget lets you focus on the important stuff while cutting back in other areas.
- Reviewing your budget involves dealing with people. Sit down with your loved ones and figure out how you saved in some categories while overspent in others.
- Budgets can be revised and reviewing the budget is the first step in changing it so it works for you. Perhaps you saw you don’t need to spend 5% of your income on clothing and can allocate that portion to travel or for dining out or putting some money away to save for the future.
As with budgeting, there are many ways to perform your budget review. The budget review allows you to take a look at your starting budget and compare it to how you actually spend your money. then you make adjustments for the next month’s budget. After a couple of months your budgeting skills will improve and that will help you to achieve your life goals! It really works and puts you in control.
Real world tips for reviewing your budget
- Have a clear and focused mind when reviewing your budget. Pay attention to the numbers because they tell you the truth:on target, overspending or surplus. You need to be open to learning how are you doing financially instead of what you perceive your finances to be.
- You should understand your budget and when there is a gap you need to take responsibility. Life may have hit you hard this month, resulting in unforeseen expenses. And, with an emergency fund you can weather the storm.
- Review your past monthly budgets to help plan the future budgets. Take a look at what just happened, learn from it to better plan for the future. Look at what’s happening next month and improve your budget.
- Enlist the help of your family. The people who helped create your budget (i.e. spouse) should be involved in the review process as well.
- Be patient and remember this is about getting better and not being perfect. Budgeting takes practice and discipline which can be learned.
Evaluating and forecasting trends in your budget
Once every three months, compile your last three budgets and review them. Try to look at the big picture and see if you can notice improvements or problems in the categories. You’ll likely see a trend in your spending patterns and will know if you are spending within your means or maybe you need to focus more on cutting back. A great way to look at this is to put your budgets side by side (either in an excel document or write it out) and highlight in green the amount each month that you underspent and in yellow the amounts in each month you overspent. Colour coding the amounts will quickly provide a visual for which categories you are consistently under or overspending.
Once you see the trends, take a look back at your notes made for each of those months and put together a note or two for the reason of the trend.
Doing just those three things (putting your budgets side by side, highlighting them and making notes) will give you the results you are looking for.
Next steps in Simple Money Living
Thank you for following Simple Money Living, a ten article series to achieve financial freedom. We’ve come a long way from setting up our emergency funds to reviewing our budgets monthly. We have four informative articles remaining in the series; we’ll be discussing how financial success is 10% knowledge and 90% behaviour, using our smart debt elimination tools, save for the short term and invest for the long term, and how to leverage the advice of great advisors. Thank you for being part of the Simple Money Living Journey.