Inside: Learn how often you should review your budget to monitor your spending and progress toward your financial goals. Plus, understand how to close out a budget each month.
I am a very goal-oriented person. I love to make goals and devise action steps to reach those goals. This trait supports my role as a financial counselor, as my career centers around helping others set and reach their financial goals. When I am really inspired or motivated for a new goal, I’ve been known to carve out a significant portion of time to devote to this goal-planning process. However, no matter how much time I spend on the creation of the goal, the more important step toward reaching this goal is monitoring progress along the way. How will I know when I am on track, need to adjust, or have met my goal if I am not intentionally reviewing periodically?
Budgeting relies on this crucial review component as well. Each month, we create a budget with the goal of spending and saving specific amounts. At the end of the month, we hope that we followed the budget and we can open our bank account to see our balances grow. But, how will we know if we are on track throughout the month if we are not reviewing? Or, zooming out, how will we know if our monthly budget habits are pushing us toward a larger annual financial goal? I ask my clients all the time, “What is the point of taking the time to set up a budget if it stays out of mind throughout the month?” Learn how easy it is to incorporate a regular budget review into your money management routine.
Reminder: How to budget
If you are new to budgeting, be sure to check out our “Budget Basics” series on the blog for an overview of several budget methods. In the meantime, here is a quick refresher on how to budget each month!
1. List your expected income for the month. Record your expected paycheck amounts plus any additional income that you expect to receive.
2. List your expenses. Next, create a list of expenses for this month. Start with the items you have to pay, like rent and utilities, then add in the things you want to buy, like going out to dinner or seeing a movie in theatres.
- Give each category a dollar amount as a spending guideline. If you are not sure where to start allocating your income, review your spending for the last three months and take an average for that budget category. Or, check out Dave Ramsey’s suggested budget breakdown and calculator that compares your categories to the national average.
- Don’t forget to budget for fun; just put a spending cap on it! Plus, if you want to add a “buffer” to your budget for things that come up, consider creating a “miscellaneous” category.
3. List your goals. If you haven’t already, determine the amount you want to put into savings this month. Likewise, record any extra debt payments you plan to make.
4. Summarize. Now, review your budget. Total your income and expenses. Subtract expenses from your income amount. If your ending number is positive, then you have a budget surplus. Determine where you want to allocate these extra dollars, like into the miscellaneous or savings categories. If you have a negative number, you have a budget deficit. Go back to your budget categories and make adjustments until you are no longer in a deficit.
Where the budget review fits within the budgeting process
Once you’ve set up your budget, review it at regular intervals to make sure you are following the plan you’ve laid out. (Note: We will mainly focus on monthly budgeting cadence in this article, but you can repeat this review process for any budgeting period.) Remember, budgeting gives you permission to spend but with guidelines. The budget review ensures that you are operating within the guidelines, and it can provide awareness when you need to make a mid-month spending adjustment.
Second, when you reach the end of the month, it is important to take a look back at your spending and see what adjustments, if any, need to be made for next month. This end-of-the-month review is also known as closing out your budget. You are tracking the final few expenses, identifying areas of success or improvement for next month, and double-checking your checking and credit card balances. Once you have last month’s budget tidied up, it’s time to close that budget and move on to planning for next month’s expenses.
How often you should review your budget
The frequency at which you should review or close out your budget can vary from person to person based on budgeting personality, pay dates, spending habits, or — if budgeting with a partner — communication timelines. As you set up your money management routine that works for you, you will naturally find a rhythm to check in on your progress. For more hands-on budgeters, you may like to review your budget weekly. For others, you may find a less frequent review is sufficient.
In general, you will want to review your budget at least:
- Every time you get paid. Use this time to identify upcoming bills and monitor cash flow until the next payday. Transfer money into savings. Think of this quick review as your regular money maintenance.
- At the end of every month. Utilize the end of the month to close out the budget, reconcile accounts, identify any adjustments, and write out next month’s budget. Think of this budget review as your monthly money reset.
- At the end of the year. When the year draws to a close, take a moment to reflect on the income you made, the goals you met, and the habits you built. Think of this as your annual money recap.
How to review and close out your budget
Take a few minutes each time you review your budget to walk through these five steps. Once those are complete, you will be ready to start fresh for the next budget cycle!
- Finish tracking all expenses. This is the most hands-on portion of your budget review. Record your spending throughout the month. This is done quickly on a weekly basis by opening your banking app and logging your transactions from the past week. You can also collect receipts throughout the week to keep a record.
- Double-check all bills are paid. Sometimes, it’s easy to have a bill slip our minds! Check to see if all automatic bills came out of your account and that you’ve rendered payment to any other outstanding bills.
- Review any overages. Did you overspend in any budget category? Ask yourself if this was an unusual overage or if it is a regular occurrence. If you find that it is becoming habitual, consider adjusting that category in next month’s budget. Also, take time to review your bank account. Do you have money left over? Do you need to transfer money to or from savings for any reason? Consider when you get paid next and which expenses will be coming out in the meantime.
- Reflect on the past month. Review your budget. Did you follow the budget you set out at the beginning of the month? Where do you deserve a gold star? What areas can you improve upon next month? Budgeting is not going to be perfect each month, and it takes practice! Review the good and the not-so-good, and strive to keep improving.
- Identify goals for next month. Finally, using the insights you gained in the previous step, determine goals for next month. Consider any upcoming extra expenses to plan for and monitor progress toward any savings or debt reduction goals.
The importance of budget review
Budgeting isn’t always fun to put on your to-do list, but it is always important. Establishing a regular money management routine of creating and monitoring the budget ensures you are keeping your financial goals at the forefront of your money management. Do you currently review and close out your budget regularly? Let us know in the comments!
What do you think?