This is the third installment in our series about how to create and use a budget to monitor and improve real-world spending habits. In Part 1 and Part 2 we introduced key concepts you need to understand to get the most out of this installment. If you haven’t already, please read those installments before diving in here.
OK, so now let’s use that “discretionary-only” spreadsheet we created in Part 2 to build out a weekly spending review practice. Let’s pretend we are at the end of February, and our spending history looks like this:
In our last installment, we observed that if we had been tracking our spending weekly, we would have noticed that we ran out of money for discretionary spending in week 3 of January–as shown by the (31) Ending Balance. (Accounting nerd note: The “(##)” notation is a common way accounting folks express negative numbers.)
During February, we started to review our spending weekly, and–on the surface–we did much better than we did in January. In fact, those green “Total” cells for February show us that we were within our budget for three out of four of our discretionary spending categories, and we overspent only $8 on Fun Spending. Not bad, eh?
But why is our Ending Balance for Week 4 (the end of February) negative $190?
This happened because we made a classic budgeting mistake by not adjusting our February spending budget to account for our overspending by $212 in January. Our February Beginning Balance is accurate ($600 normal budget, less $212 overspent in January = $388 Discretionary Budget for February), but we needed to dig into more details to make better spending decisions.
Here we can see that our January overspending was $137 ($537 actual, less $400 budgeted) in Groceries, $25 in Coffee/Restaurants and $50 in Fun Spending.
This means that our February budget for those categories should have been adjusted downward from our normal (ideal) budgeted amounts to reflect January’s overspending.
One way to make those adjustments would be to reduce each category by the January overspending amount in that category; if we did that, our (monthly) spending targets for February could be $263 ($400 budgeted – $137 overspent in January) for Groceries, $75 ($100 budgeted – $25 overspent in January) for Coffee/Restaurants and $50 ($100 budgeted – $50 overspent in January) for Fun Spending.
Budgeted vs. Actual
By going through these mental gymnastics, we have just uncovered a fatal flaw in our budget: It makes us do math in our head in order to compare our budgeted spending to our actual spending at the category level. Let’s take a step back to dig in, diagnose and upgrade.
Notice that we have only a single location for expressing our budgeted spending by category–on the far left of our spreadsheet as shown here.
This isn’t that helpful; it assumes a world in which everything is perfect. If you think about it, you will quickly realize that “perfect” in this context means spending exactly the amounts “budgeted”–no more, and no less.
This is obviously not very practical. Not only does it not deal with overspending, it also does not allow us to understand the impact of underspending. So let’s fix that.
To get started, recall from Part 1 that a core principle is to conduct weekly spending reviews.
Given that, it follows that we want our revised budget to enable us to make adjustments to expected spending by category every week. More precisely, we want to compare actual spending to budgeted spending each week. For January, that looks like this:
We have added two new columns for each week: “Actual” (what we actually spent) and “Diff” (for “Difference,” or how that compares to the number in the “Budgeted” column).
- If we had to do the data entry for all these columns, this would be a pain, but we have not changed the amount of weekly data entry at all.
What we have added is auto-calculated analysis to give us new visibility into the impact of our weekly spending behavior.
Armed with this insight, it is now obvious that our January spending problems began Week 1 with Groceries. Our slight underspending in Coffee/Restaurants nets out our January Week 1 overspending at $37. Ideally, we would have adjusted our Week 2 “Budgeted” amounts (perhaps for Groceries) by $37, or down to $63 instead of our “ideal” budgeted amount of $100.
- Unfortunately, we weren’t looking at our numbers weekly during January, so our weekly overspending continued un-checked: Week 2: $71; Week 3: $73; Week 4: $31.
Let’s now take a fresh look at February–using our weekly review process and ability to also plan by week to become more proactive about our future spending choices.
This is where current budgeting apps fall over–when you need to:
- Make unequal adjustments to budgeted amounts in the future, and/or
- See the impact of current spending choices on future cash flow
Recall that we just turned back the clock now that we have a way to really understand our planned and actual weekly spending; on 01/31 with the superpowers our improved spreadsheet provides, we can adjust February’s budgeted amounts to compensate for our January overspending.
Starting with Groceries, we overspent by $137 in January. Since our weekly budget for Groceries is $100 ($400 per month divided by 4 weeks in a typical month), we cannot make up for January’s overspending in a single week, so let’s spread out that adjustment over the four weeks of February. That makes our weekly Groceries budget in February be $100, minus ($137/4), or $100 – $34.25 = $66.
Adjusting Coffee/Restaurants to reduce February’s budget by the $25 overspend in January, we get a weekly revised budget of $18.75 (rounded up to $19). Applying the same logic to recover from January’s $50 overspending on Fun Spending produces a revised February budget of $12.50 per week ($12 rounded down).
Our February budget now balances to the $388 we actually have to spend. (Note that we have also reset Week 1 “Actual” to be equal to Week 1 “Budgeted” amount–as it should actually be, since both numbers reflect what actually happened in January.)
Armed with more intentional targets for our discretionary spending in February, we have a solid roadmap to guide our spending choices.
Even if we don’t nail these weekly spending goals exactly, the chances are pretty high that we will do far better than before we had this weekly budgeting discipline.
In Part 4, we will discover that the iterative process of refining our future spending plans (our “forecast”) in response to our recent spending choices is remarkably efficient.
- This will get into the core of real-world budgeting–what separates the conventional budgeting tools you may have used from the robust “thinking” budgeting tools we all deserve.