Life Happens, Things Change, and So Should Your Budget

Jerevie Canlas, Ph.D., CFLE

​Whenever we teach a budgeting class, we always emphasize that there are five pieces to every budget. Every budget should have the following elements: Income, Expenses, Expense Limits, Tracking/Monitoring, and Review and Evaluate. When people budget, the first four elements are relatively straight forward. The last element, however, might be what makes or breaks your budgeting strategy. 

---

We hear this a lot - “make a budget and stick to it.” For the most part, this is true. A budget is just a spreadsheet or a piece of paper with your plan, and will work only if you implement it. And when you implement it, you get a better picture of your finances and are able to make changes to your financial behavior if necessary. Doing so allows you to achieve the financial goals you set for yourself - which is why you’re budgeting to begin with.
 
Life happens, things change, and so should your budget. This is why reviewing and evaluating your budget is important. A common mistake a lot of people make is thinking that their spending plan needs to be consistent to become effective. What actually needs to be consistent is you having a budget. Your budget, on the other hand, can be adjusted accordingly. How much your budget changes depends on you. As you monitor your gains and expenses, you will typically see patterns in your spending. Based on these patterns, you might need to make changes in your budget so you can align it with your financial goals. Here are three things to consider before you set your next month’s (or next year’s) budget:
 

1. Follow recommended spending guidelines and adjust accordingly. There are general spending guidelines recommended by financial experts that can help you allocate your income strategically. In general, it is recommended that you spend about 35% of your income on housing costs including utilities and supplies. Your food budget should be no more than about 25% of your income. Transportation and clothing are about 10% each. The remaining 20% would ideally go to savings and other expenses such as health, entertainment, etc. As you review and evaluate your budget, see if you are spending too much on any given category based on recommended guidelines and make adjustments where necessary. PowerPay’s Spending Plan feature is a really good tool for this.
   
2. Estimate your variable expenses. Most people have a hard time staying within budget when it comes to variable expenses because they change all the time. Monitoring your variable expenses, whether tracked using a budgeting app or reviewing receipts, allows you to see patterns in more than one spending category. Track your variable spending for about 3 to 4 months to get a good estimate, and then adjust your spending limits based on the average amount you spend on any given category. You can then annualize your spending limits and turn your variable expenses into a fixed expense by making them a monthly line item in your budget. 
3. Be ready to be flexible when the need arises. One of the most common reasons people give up on the idea of budgeting is because they find themselves unable to stick to the budget they set for themselves. This is totally understandable and could be quite demoralizing if you think about it. However, realizing that you can change your budget at any point can be both enlightening and energizing. Overspending in one category doesn’t mean you totally failed at budgeting. It’s ok to move money from one spending category to another. It’s all about priorities and the financial goals you want to achieve. The important thing to consider is to make sure you are not spending more than you earn on any given time frame.