The common you will find in all the best books and advice about personal finance is the use of a budget. It’s great advice, budgeting gives you a plan and a sense of direction for your money. However, without effective reviewing of this plan, your budget is likely to remain a pie in the sky dream of how you intend to use your money but never get around to doing it that way. Many will attest to the fact that they have budgets but things just don’t seem to work. In the aid of your personal finance growth let’s talk about budget reviewing. Why we should do it, how to do it and what to do after the review.
Budget
A budget, as mentioned before, is a plan for allocation of resources in general and in our case money specifically. Budgets are meant to align your actions to your goals in the short and long term. We all have some sort of goals we are pursuing and a budget is meant to assist in the planning and coordinating of your money. Planning is of course not enough. We make plans, life happens and before you know it things have not gone to plan. A budget review habit and system helps with keeping your budget realistic. It should therefore be part of the budget itself. Let’s take some time to dwell on why we should review our budgets.
Why review?
There are a few reasons we should actively pursue budget reviews. There’s a reason why businesses review their budgets with a lot of scrutinies. Here’s why we should review our budgets.
Assumptions
Firstly budgets are based on assumptions. Without complete information and a knowledge of how things will go, we have to use assumptions to set up budgets. There’s a saying that goes “always assume your assumptions are wrong” and there is no place that rings more true than in personal finance.
Expectation vs reality
Following on from the point of budgets being on assumptions we must accept that budget review allows us to compare expectation to reality. This is the crux of the budget review process.
New Information
We are rarely aware of all the information that impacts us especially when it comes to the future. Whether it’s a simple matter of not knowing the information at the time we made the plan or new information emerging there is bound to be information that is new to us. It could be as simple as a more affordable internet or insurance provider.
Implementation
Planning is one thing and implementation is another thing altogether. This is a fact not lost on Zimbabweans who have seen many plans fall apart due to lack of implementation. Some times the plan is just incapable of implementation and other times there is a lack of discipline.
If you can’t measure it…
Finally, if you cannot measure something then you cannot improve it. So in addition to having a budget, you need to assess how well you are sticking to your budget.
How to review
There are many budget review systems used in accounting but for personal finance, it is best to borrow for all the systems available. What you want to do is called a variance analysis in essence. Assuming you are already using a spreadsheet for your budget this will be easy. If you’re now using a spreadsheet it’s time you learn how to. It’s much easier to show you than to tell you so let’s use a spreadsheet with completely hypothetical figures to illustrate.
Our budget review system here also requires a reason for the variance. In many cases, you will see that the changes are related to lockdown, something we have no control over. However with other things they are in our control things while other things are seasonal unless you have a brother celebrating a birthday every month of the year. The round/mukando is a standing obligation that pays in some months when it is your term but for the month in question, it was not our turn to receive.
Tips to change
The famous prayer comes to mind here; Lord grant me strength to change the things I can, serenity to live with those I cannot and the wisdom to know the difference. We have to discern first what, if there is anything, we can do to change the reason behind the change especially if it is negative. I don’t think we have done too badly as we have met all of our obligations though we have sacrificed our investing goal. If say our internet provider had increased the price beyond the budget we would consider alternative providers. In the case where we spent 350 dollars more on transport because of travelling for groceries perhaps considering a service that delivers may be worth it. In most cases, it is a behavioural change that is required or results in positive variances.
The system we have used here is simple but adequate for anyone who wants to start reviewing their budget. It will give you insights not only into the changes but the reasons behind them.
