How to Set Up Your First Successful Budget – Part III (Tracking & Review)

This is the last post in my three-part series on budgeting basics. I will wrap up the series by discussing strategies for tracking and reviewing your new budget to ensure that it’s working for you in the way you planned.

If you’ve completed Parts I & II of this task, you should have a good idea of the types of budgets you can use, some of the benefits of having a budget, your monthly income and expenses, and how to set up a complete balanced budget. If you missed out on any of these, here are the three parts of this series:

• Part I – Understanding and Research
• Part II – Organizing and Setup
• Part III – Tracking and Review (this post)

Status Check

Before you begin, ensure that your budget is ready, and you’ve accounted for all the expected saving & spending. You should begin your tracking efforts on the first day of the month, but it’s not a bad idea to practice ahead of time. Just don’t worry too much about the results until you actually start.

Software Options for Budgets

What software or tool you use for tracking a budget is just as much personal preference as anything else in personal finance. Many people opt to setup Excel or Google Docs spreadsheets, while others prefer the structure of Quicken or Microsoft Money. There are also online services available, like Mint, Your Need a Budget, and Mvelopes. And you can always go the old-school route and simply keep a notebook.

Whatever method you choose, be sure that it fits your life well, and that you’ll be able to access it when it’s necessary to make entries and review progress.

Tracking a Limit Budget

• Ensure that your income is on-track with your budget. Be mindful of planned income that only occurs every few months.
• Track spending against pre-established limits. Some software programs use a progress bar with the day of the month and what your projected month-to-date spending should be.
• When you reach a budget limit, stop spending in that category. Continuing to spend will cause you to exceed your limit and you’ll have to make up for the difference elsewhere.
• Rinse & repeat. Once the month has ended and you have successfully stuck to your budget, repeat the process (after making some changes first, which I discuss below).

Tracking an Envelope Budget

• Once you receive income, distribute the money to your envelopes based on your spending plan. You may have to put more money in some envelopes at different times of the month because of known upcoming bills and expenses before your next paycheck. Once you have a reserve built up, funding will become more automatic.
• Charge expenses against the envelope. It’s fairly simple – each expense gets taken out directly from the envelope to which it belongs.
• Once down to $0, your envelope fund is exhausted. Avoid the temptation to “borrow” against yourself and start into a negative envelope balance. When you’re out, you’re done spending.
• Rinse & repeat. Each time you get paid, continue the process. Once again, be sure to review the budget as described below.

Mid-Month Changes

In order for your new budget to have maximum effectiveness, you must track expenses at least once a week. You must also be ready to adjust your budget mid-month for any unexpected or unique expenses that come up. Here are a few tips:

• Change is natural. Don’t become scared of your plan, or frustrated with your progress if things don’t go as planned. Change is a natural part of every budget, and especially in the first few months, it will require a great degree of flexibility on your part. Understand this and practice budgetary patience.
• Be mindful of the end goal. Be ready to make small adjustments to your plan and keep the end goal in mind – your budget is just a plan on how you’ll spend your money so that you spend less than you earn. How you achieve this is of little relevance in the end, only that you achieve it. You can spend $200 on groceries and $300 on gas in January, then spend $300 on groceries and $200 on gas in February. In June, the only thing you’ll remember is that you met your budget successfully.
• Limit Budget. Making small changes in a limit budget involves monitoring your limits and understanding what to do if you exceed them. If your gasoline budget was $200, but you’ve exceeded it by $50 and it’s the 18^th of the month, you’ll need to severely cut back spending in other categories (or stop driving). Try to “project” your total spending for the month based on the current day of the month and your month-to-date spending in that category. Many software programs do this for you automatically.
• Envelope Budget. If you’re using an envelope budget, moving money from one “container” to another is as simple as a transfer of funds. Envelopes that are under-used that month can be utilized to supplement a problem category.

Long-Term Changes

In addition to making steering corrections mid-month, long-term changes are also necessary for the budget to ultimately succeed:

• Corrections to assumptions. If your original spending estimates turn out to be significantly over or under your actual tracked spending, adjust your budget as needed to compensate. You may have to take away from other areas, or you may have extra cash to commit to savings.
• Shifting priorities. Perhaps you’ve just had a baby and you need to save a lot of money for child expenses, or you’ve just paid off your car loan and need to save more toward retirement. Our lives are always in a state of change, and our budget priorities should shift to reflect those changes.
• Changes to income. It’s a fact of life that our income is rarely static, and particularly so for the self-employed and hourly workers among us. Increasing income is rarely a concern, although the extra money should be assigned to an appropriate use. Decreasing income, however, has the potential to wreak havoc on our budget and should be dealt with as soon as possible with budget cuts and spending freezes.

Budgetary Success

Following my three-step plan should provide some degree of success with your own budgeting. If you find that something was unclear, or particularly like a certain section, please let me know. Although “Personal Finance Basics” inspires thoughts of permanence and everlasting truth, this guide will need to be updated as future technologies emerge and budgets get more and more sophisticated.