How to Run an Audit on Your Budget
Reviewing and updating your budget regularly is critical for reaching your financial goals. Here’s how to run an audit on your budget to make sure you stay on track.
February 15, 2022
As mundane as they sound, budgets are the bedrock of financial stability. They help you ensure your money goes toward things like paying off debts, building an emergency fund and saving for retirement.
However, for your budget to do its job, you have to audit it regularly. Look for areas of consistent overspending, account for rising costs and make changes as necessary to stay on track for your financial goals.
To help you get started, here’s a step-by-step guide on how to get a bit of personal budget help by running an audit on your budget effectively.
Step 1: Gather your documents or use budgeting software
To analyze your spending habits properly, you need more information than just your total expenses over a given period. You should also know things like the merchants you buy from the most and the number and dates of your transactions.
These types of details give you some much-needed context for your numbers. Without them, it’s difficult to do any real problem solving.
For example, say you spent $400 on food last month and want to take that down to $300 next month. That becomes a lot easier when you know that $150 of your spending went toward a single night out at a sushi restaurant.
There are two general ways to get these kinds of details. The traditional way is to gather your bank statements, credit card statements and other documentation you use to track cash expenses.
That works just fine, but it can take a lot of time. To make it easier on yourself, you can connect your accounts to budgeting software and review your transactions there.
Step 2: Identify any permanent spending changes
If you have a budget in place, you should already have a pretty good idea of where your money goes. However, it’s unlikely your actual spending will match your personal budget template exactly each month.
You’ll probably go over in some areas and be under in others. There’s nothing wrong with that, but it can keep you from noticing gradual changes in your costs if you don’t pay attention, so take the time to look for them.
For example, inflation was roughly 6.8% in 2021. If you see that you’ve gone over your budget for gasoline for the last three months as a result, you may want to factor the permanently increased cost into your budget.
Naturally, you could also update your expectations in the opposite direction when you see an opportunity. If you spent $100 less than you budgeted on food for a few months, you might want to hold yourself to that standard in the future.
In addition to looking for permanent changes in existing spending categories, watch for any new expenses that don’t have a category in your current budget. If you know that they’re going to be a recurring issue, create a new category for them.
Likewise, eliminate any categories you know aren’t going to be relevant in the future. For example, say you move to New York and sell your car. You’d remove your car insurance and gasoline budgets and add one for the cost of a MetroCard.
Step 3: Reassess your financial goals
Once you’ve reviewed your spending activities and updated your budget accordingly, take the time to check in with your financial goals. After all, a budget is ultimately just a plan for reaching them.
Start by reviewing your progress toward your existing goals. If you’ve consistently kept up with the pace you were hoping for, take a moment to celebrate! If you’re not quite where you want to be, calculate how long it might take you to reach your goals.
Next, consider whether you have any goals that you’d like to add. Maybe you’ve recently decided to start saving for a house, or perhaps you have a new chunk of credit card debt that you need to pay off.
Don’t worry about making any further changes to your budget at this point. Just focus on defining your vision for the future and documenting whether you’re on track or not.
Step 4: Trim any waste you can find
At this point, you have a budget that accounts for recent changes in your spending, a clear picture of your financial goals and an understanding of your progress toward them. Now it’s time to start tweaking your budget to course correct as needed.
To start, think back to when you first began tracking your spending. If you’re like most people, you probably found some obvious waste. Many of us have expenses like unused streaming services and old gym memberships that make for painless savings.
After that initial round of cuts, those easy wins are harder to come by, and many of us stop looking for them. However, they can start creeping back over time if you’re not careful.
When you audit your budget, look to cut any wasteful expenses that might have developed since you last reviewed your spending. Even if they’re small, they can add up quickly.
Step 5: Check-in on your long-term budget cuts
The two most significant expenses in the average American budget are housing and transportation. That means most of your monthly spending probably goes toward your rent or mortgage and your car.
Unfortunately, those costs are also the most difficult to change. For example, you can always cut back your food bill by eating out less, but it’s not as easy to move to a cheaper apartment.
As a result, reducing these costs should be a long-term project. When you audit your budget, consider whether you’ll have an opportunity to change one of them soon.
Maybe the lease for your apartment is expiring in a couple of months, or you’re starting to get reminders that you need to renew your car insurance soon.
If so, consider making a move that will reduce these costs since it can often save you more than all your other cuts together.
For example, say you pay $1,400 a month for a one-bedroom apartment and spend $80 in gas commuting from it to your office. By renting a studio that’s 15% cheaper and decreases your commute by half, you’d save an extra $3,000 a year in one fell swoop.
The final step: Plan your next budget audit
Last but not least, for a final bit of personal budget help, always finish your audit by putting the next one on the calendar. Financial planning is only beneficial when you do it consistently, so commit to checking your spending regularly.
A monthly review is perfect if you’re relatively new to budgeting, but you can cut back to once a quarter after you feel more confident. If you need personal budget help, you can always reach out to a credit counselor, financial advisor or professional tax planner.
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