I’m going to let you in on a little secret. In real life, people’s budgets don’t match up perfectly to their actual spending.
Think about it. You might spend $459.64 on groceries throughout the month, but what are the odds that you would have set your grocery budget to that exact amount? Maybe you budgeted $400 and overspent or budgeted $500 and came in under. Or perhaps, you budgeted $450 and got real close.
It’s hard to predict how you’ll spend every cent you make. Life doesn’t work that way.
That’s why it’s not enough to just create a budget at the beginning of the month and hope you stick close to it. If you really want to be on top of managing your money, you’ve got to close out your budget by comparing what you budgeted with what you actually spent.
Mark down where you’re over budget and under budget so you can take action.
Let’s say you’re budgeting $400 for groceries each month but you always end up exceeding that amount. Your first step should be to try to cut costs — like buying cheaper store-brand items, using coupons and avoiding impulse purchases.
But if you’re still over budget, your problem may be that your $400 limit is unrealistic for you and your family. If you increase the amount you allocate for that category, you’ll be more likely to stay on budget and feel less frustrated about your spending.
Keeping track of where you’ve overspent is also helpful in identifying erroneous charges. If you have bills set to autopay, you may not realize when you’re being charged more than you should be.
For example, if your cable bill is auto drafted from your bank account, you may not notice when you’re charged $120 by mistake instead of $100. It’s better to catch those types of errors sooner rather than later.
Another reason you ought to spend time closing out your budget at the end of the month is so you can decide where to divert any surplus funds. Let’s say you budgeted $500 for groceries but spent much less. You’re now left with more money in your checking account than you were expecting.
How you choose to use that money will depend on your financial goals and preferences. But if you don’t have a plan for that cash, it’s easy to end up blowing it on something frivolous.
Comparing your actual spending to what you’ve budgeted will give you the insight to better manage your money going forward. It’s a budgeting step you should be careful not to overlook.
Nicole Dow is a senior writer at The Penny Hoarder.