Hello world, this is Cipher, back to talk about the budgeting process. Today I would like to spend a little time talking about looking at budgeted vs. actual expenses. In order to make a budget work for us so reach our financial goals, it is important to know what we actually spend, not just what we think we will spend.
In some cases, keeping track of budgeted vs. actual expenses is easy. Rent payments are not going to change from month to month for the duration of the lease. Electric bills on the other hand are subject to change each month based on various factors; some of which we cannot control. I know my electric bill goes up in the summer when it gets very hot…not the good kind of hot either, the kind with humidity that makes you think you are drinking the air.
The fluctuations in bills like water, gas, and electric are only part of the equation. We need to know how much we actually spend on things like food, entertainment, and other types of discretionary spending. Keeping track of these things will help us identify patterns in our spending and then make mindful choices if the patterns point to a behavior that we may want to change.
At least once a year I review/update my budget and I use the highest number from the prior year to create my new budgeted amount for a category. For example, my water bill in winter might be $40 a month and $75 a month in summer. I will budget for $75 all year because I want to know that in the worst-case scenario I will always be able to pay the bill. In the months that cost less, I have extra money to allocate to savings, extra fun stuff, or pay down debt. It is nice to have extra money instead of scrambling to pay a higher bill.
I tend to pay for most items with my debit card, so at the end of the month I go over my statement and fill in the amounts that fluctuate. The reason I like to go over the statement is the effort makes me really think about the choices I made. I can hear some young person out there saying “Okay grandma, I don’t want to go over my bank statement with a fine tooth comb each month.”
I was having this conversation with a coworker recently and she mentioned that she uses an app tied to her debit card that allows charges to be categorized and it provides a chart. I am sure there are several but her choice is called Mint. This is not an endorsement of any product, just an idea to share.
While I have a preference on how to get my information, at the end of the day it is not important how you get the information, just that you have it. This information will help make the budget more accurate as time goes by.