How to Evaluate Your Budget
Learn how to assess and improve your budget
While creating a budget is the first step to taking control of your finances, it's not a one-and-done activity. Your needs and goals will change over time, so the key to making your budget work is to treat it as a living document and periodically evaluate it and adjust it as necessary to ensure that it meets your current financial goals.
When you evaluate your budget, you compare what you spent against what you planned to spend. Ideally, you should reflect on your budget at the end of every month and use that information to plan your budget for the next month. You should also sit down and assess your total budget and your overall financial goals at least once a year. Evaluating your budget requires a series of steps but is a low-effort process that doesn't take as long as setting up your first budget.
Compare Actual vs. Planned Spending
After you create a budget for the month, you should track your spending throughout the month in a budget spreadsheet, software, or an online app like You Need a Budget, ideally on a daily basis. With your budget and your expense tracking in front of you, assess whether you overspent, underspent, or stayed on budget for the month.
If your expenses exceeded what you had allocated, you may be able to reduce expenditures in any spending categories that were consistently higher than you had budgeted. Similarly, if you spent less than you had planned, there may be an opportunity to increase expenditures for the next month in any spending categories that were lower than you had budgeted. If you spent what you planned to spend, you're on the right track, but your budget may still require changes depending on your financial picture for the next month.
Assess New Income and Expenses
Since a budget represents your spending plan for a given month, it's important to ask yourself at the end of the month what your income and expenses are for the next month. These may be the same as or dramatically different from those last month.
Any lifestyle change can trigger an increase or decrease in income or expenses that next month's budget should reflect. For example, a job loss could produce a drop in income. If you are getting married or having a child, you might face an increase in spending in certain categories, such as food, utilities, and personal care products, to name a few. One-time or seasonal purchases like wedding gifts or holiday shopping can also cause a temporary spike in expenses.
If possible, include planned splurges in your budget to avoid depriving yourself and give yourself an incentive to stick to your budget.
Review Your Financial Goals
Beyond fluctuations in income and expenses, your financial goals can also change from month to month. For example, if you recently paid off debt, you may have a lot of extra money in your budget to redistribute to other spending categories. And if you want to build an emergency fund, your expenditures for saving could increase starting in the next month. Once you set a goal, it's important to build it into your budget to achieve it.
If you are budgeting as a couple or a family, schedule a budget meeting a few times a week to reflect on how budgeting is going for the month. This can keep everyone in the household accountable for their spending and keep you on budget.
Modify Your Budget to Meet Your Needs
Once you establish a baseline of income, expenses, and financial goals for the next month, adjust your budget to reflect it. This may be as simple as cutting unnecessary expenses and moving money from one spending category to another. But if any of these financial elements have changed drastically, you may need to significantly change your allocations to each spending category.
You can make increases or decreases to one, a few, or all spending categories. For example, if you find yourself debt-free and with hundreds of extra dollars each month, you can direct all of those dollars to a select few spending categories or divide the money equally across all categories.
Identify and Plug Budget Leaks
In addition to updating your budget to reflect your financial status, the process of evaluating your budget may reveal hidden problems in your spending, known as budget leaks. To solve them, you'll need to put additional constraints on your spending.
For example, you might discover that you relied too much on a credit card or dipped into a savings account, in which case you might want to switch to a cash-only budget, leave your credit card at home (or even freeze it in a block of ice), or put your savings in a certificate of deposit (CD) so that it is more difficult to access the money. Putting these self-imposed limits in place can help you rein in your spending throughout the month.
Likewise, if you struggled to apportion funds for different spending categories, consider switching to an envelope system, where you divide cash into separate envelopes for different spending categories.
If you overdo online shopping, avoid storing your credit card information with retailers; the extra effort of having to enter your information each time will force you to reflect on the need for the purchase and forgo it if it's unnecessary. It's a good idea to think about a purchase for at least five minutes before you proceed.
Review Your Budget Monthly and Annually
Assess your new budget at the end of the month to make sure that the changes are actually working. Routinely performing this monthly financial check-up won't take up much time and will help you optimize your budget over time.
It can also be beneficial to set aside time once a year to look at your annual budget, which is a plan for how you will spend money over the next year taking into account your yearly income and expenses. Unlike a monthly budget, an annual budget also includes irregular expenses (car insurance and medical bills, for example) and reveals broader spending patterns. Preparing this type of budget allows you to see where your money is going over time, which can help you prioritize your spending so that you can reach your long-term financial goals.