A budget is more than just a passive spread sheet, created in the spirit of good intentions only to end up in the bottom of the drawer forgotten.
Instead, a budget is a tool to help you control your finances. If you want to drive in a nail, you reach for the hammer, if you want to gain control over your finances, you whip out your budget.
The method that I use (and that is explained below) for monitoring financial progress is to compare actual spending with what you have budgeted and make adjustments either to your spending or your budget (if it’s not realistic) in order to stay on track to reaching your financial goals.
First you need to create a budget and create a method for tracking your spending:
- Begin by tracking your expenses. Get to know your current financial situation and financial health. Work out if you are spending more or less than you earn. If you are consistently spending more than you earn, you may need to take a serious look at your spending patterns.
- Draw up a budget using the information that you have gleaned from tracking your expenses. Your budget should show income per month, expenses per month and net cash flow – how much is left over at the end of the month.
- Think about your financial goals and run some calculations to work out how much money you will need to achieve your goals. Now adjust your budget to include these new amounts. You may need to make adjustments to your spending patterns in order to achieve these goals. Your budget is your roadmap to success.
Next you need to create an easy way to compare actual spending with budgeted spending. While there are many software options available, I prefer the flexibility of a spreadsheet. I like to be able to tailor my budget to give me the information I want.
Check out the excel tutorials for more info on how to draw up a budget like this.
The advantage of drawing up your budget this way is that you can see how your cash flow is tracking each month, how much you are spending in each category over the course of the year, and how you will fair overall by the end of the year. The beauty of a formulated spreadsheet is that you can see immediately how one small change can affect your whole budget and your whole year’s finances.
Once you have your budget set up, continue to track your expenses, and display the results in a separate excel sheet, in the same format as your budget.
Using Excel’s referential formulas, you can easily compare your actual income and expenditure against your budgeted income and expenditure to see how well you are going. On a third sheet deduct your budgeted amounts from your actual spending to see the variance between your budgeted and actual spending – in other words how well you are sticking to your budget and achieving your financial goals.
If it looks like you might overspend in a category, you can nip spending in the bud before you overspend, make spending adjustments in other categories to compensate or spend less next month to balance it out.
A budget is an invaluable tool when it comes to gaining control over your finances. Using your budget in this manner gives you the power to make informed decisions about your money. You are no longer in the dark about what you are spending your money on, how much is left over at the end of the month, and how much you are saving each year. You can see at a glance whether you are on track to reaching your financial goals. You can tell whether you can afford to buy something (particularly big ticket items) and can immediately see how impulse spending will affect your overall finances.