Couple Budget

How to Budget: Don’t Miss This Step

Tuesday, February 8th, 2011

Regular readers know I highly recommend that everyone use a budget, or as I prefer, a Cash Flow Plan.  It’s the most powerful tool I know of for smart money management.

There are three steps involved in using a Cash Flow Plan.

First, plan the use of your income.  How much will you give, save, invest, and devote to monthly expenses like food, fun, and everything else?  Not sure how much a household of your size and income should spend on this or that?  Take a look at the budgeting percentages in my Recommended Spending Guidelines.

Second, track where your income actually went.

And third, review how you did compared with your plan.  This is the step that a lot of people miss.  They plan, they track, but they miss out on the full benefits of a budget by failing to review their results and make any necessary revisions.

If you’ve set up a plan and have kept up with the tracking, a monthly review shouldn’t take much time at all.

Our Monthly Budget Review

We use Mint.com to plan, track, and review our cash flow.  It takes a little while to get Mint set up, but once you do, a simple click on the Budgets tab will show you how you did compared with your plan.  Here’s a snippet of our January results, showing three categories.

Notice a few things:

Just because we didn’t spend any money in a category doesn’t mean that money is available for something else.  For a lot of our periodic expenses or bills – those that occur sometime each year, but not every month, like our semi-annual auto insurance premium – we transfer one-twelfth of the annual amount into a savings account each month.  So, seeing a zero in that category doesn’t mean we can go spend an extra $55 on clothing.  That $55 was transferred from checking into savings so we’ll have the full amount when the premium comes due.

Second, it may be okay to overspend in some categories.  You’ll see that we overspent our parking & fees budget.  That’s because our vehicle’s electronic toll device hit up our checking account for $40 in January.  Since we don’t drive on the tollways all that often, this category will soon even out.

The same thing typically happens with some of our utility bills like natural gas and electricity.  Our gas expenses are usually over budget in the winter but under budget in the summer.  We could customize our budget, altering the amount we plan to spend each month, but we prefer to keep each month’s plan the same.  If you don’t have enough money in reserve to ride out the ups and downs of such categories, you may be able to request even billing from your utilities.

Third, keep a special eye on discretionary categories like groceries, clothing, and entertainment.  These are the categories that may not even out over time on their own.  We overspent our grocery budget in January.  As Jude and I talked about it, we decided that the amount we had allocated for groceries was unrealistic, so we upped our budget.  Of course, that meant we had to reduce our planned spending in some other categories.  The other alternative would have been to try to spend less next month.

Make sure you don’t skip this third step to using a Cash Flow Plan.  A monthly review will go a long way toward keeping your plan on track.

How often do you review your spending?

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Categories: Planning

3 Responses to “How to Budget: Don’t Miss This Step”

  1. john swift says:

    Matt, how many categories do you budget for? I use EXCEL which keeps a rolling report each month on monthly expense vs. monthly budget and cumulative expense vs. cumulative budget. When those latter figures turn red, we have been spending next months budget already. By artful combination, we get by with 35 categories, which we track daily. My favorite budget story is my wife saying once, on the 25th of the month, let’s go out for dinner and my reply was fine, we have $9 left in our “dining out” account, where would you like to go.

  2. Matt Bell says:

    John, you’ve got us beat. We have 41 categories.

    Love the dinner story. I think that’s the power of a budget. If you’ve been tracking your expenses throughout the month, you know how much you have left to spend as you get close to the end of the month.

    We also do some creative accounting from time to time, though. If we want to order a pizza and our entertainment budget is tapped out we might call it groceries or vice versa.

  3. Emma says:

    Great post Matt. After reading this post, I have started using a cash flow plan and I am already seeing some positives. It’s a “must do” for everyone and am sure this will help me to cut down my expenses as well.

    Thanks Matt.

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