(Tiny Tips) – Evaluate Your Budget – While creating a budget is the first step to taking control of your finances, it’s not a one-time task. Your needs and goals will change over time. Therefore, the key to making your budget work is to treat it as a living document evaluate it regularly, and adjust it as needed to ensure it meets your current financial goals.
When evaluating your budget, compare your spending to your planned spending. Ideally, you should think about your budget at the end of each month and use this information to plan your budget for the next month. It would be best if you also sat down at least once a year to evaluate your overall budget and financial goals. Evaluating your budget requires several steps, but it’s a low-effort process that doesn’t take as long as setting up your first budget.
Compare Actual vs. Planned Spending
After you create your budget for the month, you should track your spending throughout the month, preferably on a daily basis, in a budget spreadsheet, software, or an online application like You Need a Budget. Use your budget and spending tracking to evaluate whether you’re overspending, underspending, or staying within your budget throughout the month.
If you’re spending more than you planned, you may be able to reduce spending in all spending categories that have been higher than planned. If your spending is lower than planned, there may be an opportunity to increase spending next month in a lower-than-planned spending category. If you’ve already spent what you planned to spend, you’re on the right track, but depending on your financial situation, next month’s budget may still need to change.
Assess New Income and Expenses
Since a budget represents your spending plan for a specific month, it’s important to ask yourself at the end of the month what your income and expenses will be for the next month. These may be the same as last month or they may be significantly different from last month.
Any lifestyle changes may result in an increase or decrease in income or expenses, which should be reflected in next month’s budget. For example, losing a job may result in a loss of income. If you get married or have a baby, you can probably expect an increase in expenses in certain categories, such as groceries, utilities, and personal care products. One-off or seasonal purchases (such as wedding gifts or Christmas shopping) may also result in temporary increases in costs.
Notes
Where possible, incorporate planned luxury spending into your budget to avoid deprivation and motivate yourself to stick to your budget.
Review Your Financial Goals
In addition to fluctuations in income and expenses, your financial goals may also change from month to month. For example, if you recently paid off debt, you may have a lot of extra money in your budget that you can reallocate to other spending categories. If you want to build an emergency fund, your savings spending may increase starting next month. Once you set a goal, it’s important to work it into your budget to achieve that goal.
Notes
If you’re budgeting as a couple or family, schedule budget meetings a few times a week to reflect on the month’s budgeting. This keeps everyone in the family accountable for their spending and allows you to stick to your budget.
Modify Your Budget to Meet Your Needs
Once you have a baseline for next month’s income, expenses, and financial goals, adjust your budget accordingly. This can be as simple as cutting unnecessary expenses and moving money from one spending category to another. However, if any of these financial elements change significantly, you may need to make significant changes to the allocation of each expense category.
You can increase or decrease one, some, or all spending categories. For example, suppose you are debt-free and have a few hundred dollars left over each month. In that case, you can funnel all those dollars into a few selected spending categories or spread the money evenly across all categories.
Identify and Plug Budget Leaks
In addition to updating your budget to reflect your financial health, evaluating your budget can uncover hidden problems in your spending, called budget leaks. To solve these problems, you need to limit your spending further.
For example, you may find that you rely too much on your credit card or dip into your savings account. In this case, you may want to switch to a cash budget and leave your credit cards at home (or even freeze them at home). (ice cube) or put your savings in a Certificate of Deposit (CD) to make it harder to withdraw funds. Setting these self-imposed limits can help you control your spending throughout the month.
If you have trouble allocating funds between different spending categories, consider switching to an envelope system that separates cash into separate envelopes for different spending categories.
Notes
If you over-shop when shopping online, avoid storing your credit card information with the retailer. The added hassle of having to re-enter your details each time forces you to consider the necessity of the purchase and, if it’s not necessary, abandon it. It’s a good idea to spend at least five minutes thinking about your purchase before proceeding.
Review Your Budget Monthly and Annually
Evaluate your new budget at the end of the month to make sure the changes are actually effective. Performing a regular monthly financial review doesn’t take much time and will help you optimize your budget over time.
It’s also beneficial to take the time to review your annual budget once a year. This is a plan for how you will spend your money over the next year, taking into account your annual income and expenses. Unlike monthly budgets, annual budgets also include irregular expenses (such as car insurance and medical bills) and reveal broader spending patterns. Creating a budget like this allows you to see where your money is going over time. This can help you prioritize your spending to achieve your long-term financial goals.