Back to Basics :: Reviewing Your Budget

Do you ever wonder where your money goes each month? Does it seem like you have gotten sidetracked when it comes to reaching your financial goals? If so, you may want to review and perhaps revise your budget. Doing so can help you determine how you are spending your money, and that might show you what you need to do to get back on track.

"Oh, we don't need a budget," you might be saying. "We have plenty of money." If that is true, great! But if you are not reaching your financial goals, there is a reason for that. Reviewing (or simply creating) your budget might help you find out what that reason is.

Examine your financial goals

The first part of reviewing your budget should be an examination of your financial goals. After all, planning any trip's itinerary depends in part on knowing where you want to go! Make a list of both your short-term and your long-term goals, and prioritize them. How much will you need to save for each one, and how long will you have to reach them? Should you forestall some of lower priority to reach others of higher priority?

Keeping track

Budgeting is largely about tracking your income and expenses. You can do this with a pen and paper, or you can use one of the many software programs or web-based applications designed for this purpose. The most important element of this process is to do it consistently.

Should you count every penny? Not necessarily, although to some extent you cannot control the dollars if you do not track the cents. But focus primarily on meeting the basic expenses of life and then allocating what it will take to meet your goals.

Income and expenses

Much of your income may come from your regular paycheck or (if you are retired) from government benefits such as Social Security, a pension, or retirement account distributions. But do not forget to include all forms of income, such as child support and/or alimony, and even irregular or seasonal income, such as tax refunds, dividends, or interest.

Expenses generally fall into two categories. Fixed expenses are the "have-to" basics: housing, utilities, food, clothing, and transportation. Discretionary expenses are "want-to" items: eating out, entertainment, vacations, and hobbies.

Irregular expenses cannot be predicted, but they always occur: car repairs and home maintenance are good examples. Remember to include these types of expenses in your accounting. For example, if you buy tires for your car every 3 years, one-third of the total is your annual expense.

Caution: While you may find it easy to use your credit card for irregular expenses, do so only as a convenience. Be prepared to pay off the credit card charge with funds you have set aside in your budget for these expenses.

Finally, prioritize the funds you will need to meet both your short- and long-term goals as regular expenses in your budget.

And the answer is...

Once you have added up your income and expenses, you will need to compare the totals. Are you spending exactly what you are making? Congratulations, your budget is perfectly balanced! Even better, if you are spending less than you are making, you have a surplus. If that is the case, you can allocate that surplus to either reaching your goals faster or funding new investment opportunities.

But if you are spending more than you are making, you are running a deficit. You might not feel the pinch if you are very good at juggling or funding it with increasing credit card debt or a home equity line of credit. But even the best of jugglers drop the balls sometimes, and increasing your debt can be dangerous. If that is what you are doing, you are sidetracking your budget into a dead-end spur.

So, to balance your budget and get back on track toward meeting your goals, you will have to either increase your income or reduce your expenses--or both. As you may have seen while tracking your expenses, it is often your discretionary spending that leads to a derailment when it comes to meeting your goals. Rather than shortchange your goals (you will only be shortchanging yourself if you do), work on reducing discretionary expenses.

Staying on track

You will need to monitor your budget to keep it on track. Remember that, like life itself, you will need to keep your budget as flexible as your changing circumstances may demand.