This is the fourth installment in our series about how to create and use a budget to monitor and improve our spending habits.

  • In Part 1, we covered the importance of funding Savings First, and we introduced “The 30 Percent Rule” to express that we have control over only about 30 percent of our spending. This means that we have to pay close attention to just that “discretionary” spending.
  • Part 2 emphasized the importance of weekly spending reviews to keep on top of our discretionary spending categories.
  • Part 3 introduced the value of quickly (and automatically) seeing how our actual spending each week compared to our best intentions, which arms us with the ability to quickly adjust future spending plans in response.

If you haven’t already, you will want to read those installments before digging in here.

Budget Guided Spending

Here is February’s adjusted budget as of the beginning of the month (reflecting our overspending in January):

Fig. 1- February's Adjusted Weekly Budget

Fig. 1 – February’s Adjusted Weekly Budget – as of 02/01

We start the month with a total Discretionary Spending budgeted amount of $388, which is the $600 we would normally have to spend, less the $212 we overspent on January.

After Week 1, we spend 5 minutes to enter our discretionary spending for that week:

Fig. 2 - Feb. week 1 spending

Fig. 2 – Feb. week 1 spending

We did pretty well, spending just slightly over budget on Groceries and Coffee/Restaurants.

We skipped Fun Spending, so the week nets out to be just $5 “in the red,” as reflected in the $286 Actual ending balance (which is $5 less than the Budgeted ending balance of $291).

With just a few minutes of effort, we have exactly the information we need to accurately adjust our future spending plans.

Just a few minutes of effort each week empowers us to stay on track with our spending goals.

Let’s see how that adjustment process would look:

Fig. 3 - Adjust budget in response to Week 1 spending

Fig. 3 – Adjust Week 2 budget (and future week’s numbers) in response to Week 1 spending

The first thing to notice is that we have adjusted the Budgeted Beginning Balance for Week 2 to match the Actual Ending Balance from Week 1.

This is because we are in Week 2; we are no longer predicting (or forecasting) what our Week 2 beginning balance will be. We know what it is.

  • This step is crucial–otherwise, our budget would be calculating the impact of our spending adjustments starting from the incorrect beginning point. (In this example, if our Week 1 spending had been perfect, our Beginning Balance for Week 2 would be the $291 Budgeted Ending Balance shown for Week 1, not the Actual Ending Balance of $286.)

To make our Week 2 spending plan adjustments, we decided to stick to our already-stingy $66 weekly amount for Groceries, and we spread that $17 of Week 2 overspending, less that $12 we didn’t spend last week on Fun Spending, between Coffee/Restaurants and Fun Spending for this week. We tried a few combinations of these numbers–always keeping that projected (“Budgeted”) Ending Balance for Week 4 at zero. That number is our key indicator that we are on track to meet our spending goals overall for February.

Pro Tip: Anchor planned spending adjustments to a key Ending Balance number, like we did here by keeping our Budgeted Ending Balance for the end of February at a zero value.

February Forecast

At the end of Week 2, we’re on a roll–not only because we are getting the hang of sticking with weekly spending goals, but also because it’s getting easier to update our forecasted spending for more than just the next week:


Fig. 4 – Update February’s forecast after Week 2

We actually spent under budget in Week 2, so we had a couple of extra dollars to roll into Week 3.

We decided to crank Groceries up to $75 in Week 3, then we rebalanced our forecasted budget for Week 4 by reducing Groceries to $65. Rounding out Week 3’s plans, we kept the same amounts for Coffee/Restaurants and Fun Spending that we spent in Week 2.

Week 3 wasn’t perfect, but because we have to worry about just the few transactions in these Discretionary spending categories, we are starting to make adjustments during the week without giving it much thought.

Fig. 5 - Week 3 results: No need to adjust Week 4's forecast

Fig. 5 – Week 3 results: No need to adjust Week 4’s forecast

We overspent on Groceries and Coffee/Restaurants by $5 each.

However, we avoiding spending the planned $10 on Fun Spending, so we were “on budget” overall for Week 3.

That means that no adjustments were necessary to our Week 4 spending forecast. Nice, eh?

After Week 4, we see that we weren’t quite as disciplined as we were in Week 3:

Fig. 6 - February Week 4 spending results

Fig. 6 – February Week 4 spending results

We spent slightly more than budgeted in all three areas during Week 4.

However, for the entire month, we ended up spending just $9 (less than 3 percent) more than we had planned. The means that for March, our budgeted spending amount will be $600 (ideal budget) – $9 (overspent in February) = $591. That’s over 50 percent more than we had to spend in February–all because we started paying attention to our spending habits for just a few minutes each week.

Up Next

Hopefully, you are noticing that the more we use this simple system, the more control we have over our spending habits–all by investing just a few minutes each week to pay attention to those few spending activities over which we have direct control (“discretionary categories”).

In the conclusion of this series, we will review the core ideas, point out some important assumptions and caveats and get you on your way to taking this process for a spin.