Using Your Budget to Monitor Your Progress

youhavenomoney-thumbA 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:

  1. 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. 
  2. 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.
  3. 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.

Below is just one standard format for drawing up a budget (either in a spreadsheet or old fashioned pen and paper). budgetedcashflow

This is a example budget. Click to enlarge.

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.

actualcashflow
Actual spending.

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.

variance
Variance between budget and actual spending.

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.

Image by Jeff Keen, used under the creative commons licence

Related Posts

Tracking Your Expenses
Creating a Basic Budget
Achieving Your Financial Goals

Comments

  1. says

    Well, perhaps I’m a money tracker rather than a budget lover. I also use Excel and enter all my expenses and income, using category columns in place of your monthly columns, with one month following another in rows, and a summary below. At the end of the year, I use ‘save as’ to keep the file, and then use the same worksheet for the coming year without clearing the data. That way I can see which bills are due when, and how much they were, so no surprises! I do use highlights to indicate at a glance whether something has been paid, or is still on the horizon. I try to spend efficiently so I’m not forever entering twiddly bits, and if I let the project slide, pick up again from now. Oh, and don’t forget to back up your data!!

  2. says

    Hi Pru, it’s great to hear from others who love tracking their spending. Sounds like we do similar things, just the other way round. Good idea re not clearing the data. It takes a bit of time setting up our budget every year, putting in when bills are due, and if I have to look back at previous years, I have to open the old file. I’ll have to think of how I can work that into mine! Love highlights too! Becoming obsessed with conditional formatting.

    Ta for the reminder to back up. The drive is actually sitting on my desk with a note to not be lazy and backup! And it’s been sitting there like that for an embarrassingly long time. Working as an accountant, it was amazing how many businesses lost all their data by not backing up.

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