You’ve made your budget and know exactly how much you should be spending on your fixed and variable expenses. You know how much money you make in a month and that balances with your budgeted spending. I’m done, right?
Yes and no! You have done the hard work of creating a plan and now you have to actually stick to it. There are a few steps to make this easier:
- Track your spending each month. Compare your actual expenses to your budgeted amounts
- Periodically re-visit your budget and update based on changes in your income and spending
- Use techniques to keep yourself on-budget
Let’s dive into each:
Tracking your spending
Before the days of online banking, tracking your spending was relatively simple. A simple budgeting method was to cash your paycheck and put money into various envelopes labeled for specific budget categories. When you spent all the money in the “groceries” envelope, you knew you had spent your entire groceries budget for that month.
Today, many people use online banking and credit cards instead of paying cash for everything. This presents an opportunity to track whether you are staying within your budget. Some people will use automated programs or apps (e.g., Mint) that connect to your bank accounts and credit cards, while others use manual spreadsheets and directly enter individual expenses.
Regardless of how you do your tracking, it’s important to understand if you have stayed within your budget. Once you know if you are following your budget, you will know if you have to keep doing what you’re doing, change your spending habits, or change your budget.
Periodically revisit your budget and make updates as needed
When you first make your budget, you can expect that it won’t be 100% correct. Despite your best estimations, you will likely see some variation between how much you expected to spend and how much you expected to spend. Your response to a difference between budgeted and actual spending should depend on the budget category.
If you are over budget or under budget for a fixed expense, you need to change your budget amount in the short term. This means that you didn’t accurately estimate a recurring cost and need to account for the correct amount moving forward. If you are significantly over budget – that is, you spent significantly more than you budgeted – you should look at longer term ways of reducing that spending category. This includes moving to a new apartment, changing gyms, eliminating streaming service subscriptions, and more.
If you are over or under budget for a variable expense, you need to examine whether you need to change your budget amount or your spending habits. This will be on a case-by-case basis. Let’s say you only budgeted $50 per month for food and ended up spending $500. In that case, you would have to dive a level deeper to figure out what you do next. If you spent that $500 on eating out, then you might want to look at that as a chance to change your spending habits. If you spent that $500 on groceries at your local supermarket, you might want to change your budget to reflect a reasonable amount to spend on food.
Just remember, your budget has balance. If you make an adjustment to one spending category, you have to make an offsetting adjustment somewhere else. So if you reduce your entertainment budget by $200 per month because you were under spending your expected amount, you must increase your budget for something else (e.g., emergency fund savings).
Use techniques to stay on-budget
There is no single way to stick to your financial plan. Everyone has their own approaches. Below are a few popular techniques that keep you on track:
- Use automatic transfers. Create different savings or checking accounts for different purposes (e.g., rent account, emergency savings, vacation savings) and automatically transfer money into those accounts on the day you get paid. This way, you only see money in your checking account that you can use for variable expenses.
- Pay yourself first. Make saving and investing a priority. Whenever you get paid, treat these budget items like rent or something else that is non-negotiable.
- Save throughout the year for one-off events. Look at a calendar and create a “gifts / special events” budget amount that you can use for birthday gifts, holidays, vacations, and more. This way you can have money set aside for special occasions instead of spending money from a “food” or “entertainment” budget category.
- Grow your budget over time. Your spending will change over time and your budget should reflect that. Revisit your budget when you get a raise, move to a new house or apartment, or change jobs.
- Consider the local cost of living. Many people will Google “budget examples” and use cookie-cutter budget values that do not reflect the costs of living in their area. Remember that expenses will vary based on where you live. Make sure you increase budget amounts if you live in an area where housing or food – two of the largest budget areas for most individuals – are particularly expensive (e.g., New York City, San Francisco, Boston).
