So far in this three-part series on using the single most powerful tool for truly managing money (a cash flow plan, or budget!), we’ve looked at planning and tracking your use of money. But what happens when reality turns out differently than your plan?
Step three in the cash flow planning process — reviewing — is all about monitoring that gap, dealing with it in the short term, and making longer-term decisions that will narrow the gap.
When to review
Too often, people review how they’re doing with their budget only at the end of the month. That is a natural and good time for a review, and we’ll look at how to do a monthly review in a minute. However, to manage to the numbers in your cash flow plan, it’s essential to also review your income and expenses during the month.
Managing to the numbers in your budget means looking at your cash flow frequently — perhaps as often as every day, or every time you spend money. Your budget serves the same role as the dashboard in your car. Glancing at your dashboard regularly as you drive helps you stay within the speed limit and make sure you have enough gas to get to where you’re going. In the same way, glancing at your cash flow plan throughout the month helps you stay within your spending limits. It also helps you make sure you have enough money to cover costs and keep you moving toward your goals.
One of the best benefits of using an online budget tool, such as Mint.com or the FaithFi App, is the anytime/anywhere access it gives you to your latest numbers. As long as you can connect to the Internet, you can see how your actual spending per category compares to the amount you planned to spend. You could be in the parking lot of a grocery store, for example, and in less than a minute check to see how much you’ve spent so far this month compared to your monthly groceries budget.
Knowing that information before heading into the store can help guide your spending. If you see that you’re close to your budgeted amount, you could focus only on the essentials on your list (you do use a list, don’t you?). If you have a little more breathing space, you might pick up some extras. This process of proactively managing to the numbers in your budget is essential to getting the most from the budgeting process.
Of course, you don’t have to use an online tool to manage to the numbers in your budget. If you’re using a paper and pencil tracking system, you simply make manual calculations to see how much you’ve spent at a given point in time. If you’re using the envelope system, it’s even easier. You just look inside the envelope labeled “Groceries” to see how much you have left to spend this month.
At the end of the month, do a more comprehensive review. A budget will rarely work out exactly as planned. So, take a look at where you overspent and where you underspent.
If you overspent in a certain category, there are two possible ways to respond. First, the amount you allocated for that category may have been unrealistic. A family of four can’t possibly survive on $200 per month for groceries — at least, not if everyone insists on eating three meals a day! So, you’ll have to allocate more to that category. Of course, that means you’ll have to allocate less to another category. This process of increasing one category’s allocation while decreasing the amount allocated to another is a natural part of the budgeting experience. Expect to make adjustments, especially early in your budgeting journey.
The other option is to do a better job managing your spending in that category. If you overspent your entertainment budget, for example, think of creative ways to have fun that don’t cost so much money. Instead of going out to restaurants as often, consider hosting a potluck dinner every now and then where everyone brings a dish to share. Instead of going to the movie theater as often, see which movies are available for rent or at your library for free.
Remember why you’re doing this
Keep in mind that using a budget is not about deprivation. It’s about being proactive in your use of money, creatively finding ways to get the most out of each category while staying true to a plan designed to enable you to live generously, save and invest adequately, and enjoy living with a surplus and peace of mind. And using a budget isn’t the goal; it’s a means for achieving goals, such as living with margin, being able to afford a vacation, and helping a child pay for college.
If you’re new to the budgeting process, the first few months will be about making the “Goal” columns of your monthly Cash Flow Plan as realistic as possible. If you’re intent on meeting your generosity, savings, and investing goals, you should expect to make a few adjustments. As you keep using a budget, such adjustments likely will become less frequent.
One last piece of advice regarding your monthly budget reviews: If you’re married, be sure to conduct these reviews together. It’s okay for one person to take the lead in pulling the numbers together, but both spouses should be in on the discussion of how things went and the decisions regarding what to do differently in the months ahead. Often, financial disagreements are due to inaccurate assumptions about who spent how much. Reviewing the actual numbers each month can add clarity, while fostering communication and teamwork.