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How to Budget: Don’t Miss This Step

By Matt Bell

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

In our household, 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.

There are some months when we don’t spend any money in certain categories. However, that doesn’t mean the 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.

In other categories, it may be okay to overspend during some months. For example, we recently overspent our parking & fees budget. That’s because our vehicle’s electronic toll device hit up our checking account for $40. Since we don’t drive on toll roads 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.

Keep a close watch 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 my wife 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?

Matt Bell is a personal finance author, speaker, and blogger at MattAboutMoney.com.  He has written three books, including Money, Purpose, Joy.  Matt has been featured in USA TODAY, US News & World Report, and many other media outlets.

Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.

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