Sticking to a budget is never fun. But if you can get in the habit of balancing your budget regularly, you’ll start to truly understand your finances. Then you can start saving for your bucket list items, from a home renovation to a European vacation. Here’s what you need to know.
What Does Balancing Your Budget Mean?
You probably already know the importance of setting a budget, which is the process of estimating your income and expenses. But balancing your budget means revisiting it after the fact, to learn how your spending actually played out. It’s generally a smart idea to balance your budget at the end of the month so that you can set more realistic expectations for the following month. Or, if you prefer, you can balance your budget every paycheck cycle. The most important thing is that the budget period and the balancing period need to match.
You can balance your budget on any spreadsheet, or simply by creating columns on a sheet of paper. For each category in your budget, you’ll need two columns: Planned and Actual. When you make your budget, list your income and each expense category in the Planned column. When you balance it, list everything in the Actual column. That makes it easy to compare.
Step 1: Start with Your Income
First, update your income. Note how much you actually made in the Actual column next to Income. Pro tip: Include all the money that went into your bank account, even if it wasn’t earned income. Got a store refund? A cash gift for your birthday? Add it all up!
Step 2: Update Your Expenses
Now go through each expense category and calculate what you actually spent. Here’s where it can get a little tricky: Any money that comes out of your bank account is an expense, even if you didn’t “spend” it. For example, if you moved money from your checking account to your savings account, that’s an expense. Make sure you have a category for it in your budget.
Step 3: Do the Math
Now it’s time to make sure your budget is properly balanced. Subtract all of your actual expenses from your actual income. The result should equal your current bank balance. If not, you’ll need to do some detective work. Maybe a transaction is still pending, or a check hasn’t cleared yet. Take the time to run down the issue.
Congratulations! You’ve balanced your budget. Now carry over however much money you have left into next month’s budget. You can drill down into each category to see how you overspent or underspent, figure out how much of your leftover you want to move to savings, or start planning for that world cruise. Balance your budget regularly, and you’ll be in great shape for your next financial move.