A budget is one of, if not the most important thing to do for your personal finances.
A budget can help you outline your spending and saving. It’s a tool people use to pay off debt and build wealth. A budget isn’t just something you set once, and it works. A budget is always changing as your personal finances change. To ensure your budget is helping you reach your financial goals, it’s important to review it monthly. Here is a step-by-step guide on how to review your monthly budget.
Step 1: Preparation for the Review
Before even looking at your monthly budget, the first step to take is to prepare for your monthly budget review. This step is often overlooked, but it’s so important. By preparing to review your budget, you’re gathering all the financial documents you need and setting aside time for your review. It will make this entire process so much easier.
In this step, you want to gather all the financial documents you’d need for your review. Documents to gather are:
- Bank statements
- Pay stubs
- Utility bills
- Credit card statements
These documents will be used in other steps, so it’s good to have them before you do your review. You will need them eventually. Doing this step also puts you into the state of mind of reviewing your budget.
You will also want to set aside a specific time when you start this step. It’s best to review your monthly budget on the same day of the week around the same time of the month. Usually, doing this towards the last day of the month is the best. You can even choose to review your budget on the last weekend of every month. This consistency will allow you to go through all the steps more quickly and not fear reviewing your budget.
Step 2: Review Income
Once you’ve gathered all the financial documents that you need to review your budget, the next step is to review your income. Even if you have a full-time job with a stable income, this is still a step you don’t want to skip. You will want to confirm your income for that previous month and check:
- pay stubs
- Deposit records
- Other sources of income
Income can be any money that you are bringing in from a job or somewhere else. If you sold something on Facebook marketplace, mark that as income earned that month. Or if you received cash as a gift, mark that as income. Using online tools like Mint or a spreadsheet can help make this step easier.
You will want to compare your actual income with your projected income. This is important because it helps you to track your income, but it also allows you to compare it to your projections. This comparison can help you adjust future income projects and make more accurate financial plans.
Step 3: Review of Fixed Expenses
The third step of reviewing your monthly budget is reviewing your fixed expenses. Fixed expenses are usually necessary, recurring expenses that you have every month. While these expenses usually don’t change, it’s important to review them in case there are any unexpected changes you may need to account for in your budget. This is also a good time to see if you can lower any of these expenses, like your internet bill, by negotiating rates or switching providers.
In this step, you want to compare your actual fixed expenses compared to your budgeted expenses. This is important to understand your spending habits. This can help you adjust your budget if you need to.
Step 4: Review of Variable Expenses
The fourth step is usually one of the hardest steps for people when reviewing their budget. This step requires you to review your variable expenses or your non-fixed and usually non-necessary expenses. This part of budgeting can be difficult for people because this is where overspending usually happens and where people’s budgets get ruined.
It’s crucial to review your variable expenses every month because it can provide you with a detailed analysis of how to identify areas where spending is higher than budgeted. Common areas of overspending are:
- Dining out
- Entertainment
- Non-essential shopping
If you find that you are overspending in this area, it’s time to take control of your overspending. Your budget should allow you to have some discretionary spending, but it needs to align with how much you are making and covering your basic cost of living. Find ways to cut back in this area from meal prepping to setting a strict budget.
Step 5: Review Savings and Investments
A budget is a great tool for building wealth. It’s how you can determine how much you plan to set aside for savings and investments. Your budget should give you the ability to save for financial goals by having money leftover from your income after your expenses.
Reviewing your savings in your budget can help you make adjustments. There may be times when you need to save more to meet certain goals. These adjustments to your budget can better support your goals.
Step 6: Adjust your Budget
Once you’ve reviewed your income and expenses, it’s time to adjust your budget for the new month. Make any necessary changes like adjusting your:
- Income
- Spending
- Savings
Each time you adjust your budget, your goal should be to stick to it. It’s hard to predict your actual expense every month, but with monthly budgeting adjustments, your ability to stick to your budget should be easier. These small adjustments can allow you to slowly change certain spending habits and help you reach your goals.
Final Thoughts
Your budget is your financial diary. It’s a way for you to reflect and make changes based on your current life. You can see patterns and behaviors by budgeting. Knowing these patterns can help you make smarter spending decisions which will later help you reach certain financial goals. By doing these six steps every month, you can improve your budget.