Monthly and Quarterly Budget Reviews

A budget is a forecast, and every forecast is wrong in some way by the end of the month. The review is where you find out how, and fix the plan rather than blame yourself. This chapter lays out a monthly review that takes under an hour, a longer quarterly review for the bigger questions, and shows with worked examples what the money a review uncovers can do when it is put to work.

Why the review matters more than the budget

Two households can start with the same budget and end the year in very different places. The difference is usually not discipline. It is whether anyone looked at what happened and adjusted. Spending patterns drift: a grocery bill creeps up, a new subscription appears, a category that was generous in January is tight by June. Each drift is small, and a budget that is never reviewed lets all of them accumulate.

A review also changes how a budget feels. Without one, the only feedback is the anxiety of a low balance. With one, overspending becomes information: this category was underestimated, that week was unusual, this habit costs more than it seemed. The question shifts from "did I fail?" to "what should the plan say next month?"

The monthly review, step by step

Set a fixed date, a few days after the month closes so that late transactions have posted. Forty-five minutes is enough once the routine is familiar.

1. Gather the numbers (about 15 minutes). Make sure every transaction for the month is categorised. Note income received, total spent by category, money saved, and debt balances at month end. Update net worth if you track it monthly.

2. Compare plan with actual (about 10 minutes). For each category, note the variance: how far over or under the plan it landed. Then look for patterns rather than single transactions. One expensive dinner is noise. Dining out over plan four months running is a signal.

3. Find the cause, not the symptom (about 10 minutes). Overspending on takeaway may really be a scheduling problem: no time to shop or cook on weeknights. Overspending on groceries may be prices rising, not choices changing. The fix depends on the cause. A tighter limit fixes nothing if the cause is a calendar.

4. Decide on no more than three changes (about 10 minutes). Resize categories that are consistently wrong. Schedule next month's irregular costs. Update automatic transfers if the plan changed. Limiting yourself to three changes keeps the review from becoming an overhaul you will not carry out, and makes it clear which change caused which result.

Write the decisions down, even as a single line each, and look at them first next month.

What found money can do

Reviews regularly turn up money: a subscription cancelled, an insurance policy re-shopped, a category that can shrink. The value of a review depends on what happens next. Money that is found but not redirected simply gets absorbed by other spending within a month or two. Redirecting it the same day, by raising an automatic payment or transfer, is what makes it count.

Two examples show the difference it makes. First, money redirected to a credit card balance:

A card balance of $6,000 at 22.0% APR, paid at $180 a month, takes 52 months to clear and costs $3,358 in interest. Adding $120 a month found in a review clears it in 26 months and saves $1,815 in interest. The debt payoff planner runs the same comparison across several debts at once.

Second, the same kind of found money invested for the long term instead:

Investing $150 a month for 10 years puts in $18,000; at an assumed 6.0% average yearly return, the balance would be about $24,371. Investment returns vary from year to year and can be negative, so this is an illustration of compounding, not a forecast. Which use comes first depends on the rates involved: paying off a card that charges a high rate is a guaranteed return equal to that rate, which few investments match reliably. The pay off debt or invest calculator compares the two for your own numbers.

The quarterly review: the bigger questions

Every three months, set aside about ninety minutes for questions a monthly review is too close to see.

• Income. Has pay changed? Is a raise, bonus or change in hours coming? If income rose, did savings rise with it, or did spending absorb it? That slow absorption is lifestyle creep, and the quarterly review is where you catch it.
• Withholding. If your income, family or deductions changed, check that the tax taken from your pay is still about right. The IRS Tax Withholding Estimator, linked in this chapter's sources, does this in a few minutes. A large refund is money you lent the government interest-free; a large bill in April is a budget shock.
• Bills that can be re-shopped. Insurance renewals, phone and internet plans and loan rates. A quarter is often enough time for a renewal date to come up.
• Sinking funds. Is each bucket on track for its bill? Have any yearly costs changed?
• Goals. Are you on pace for the emergency fund, the debt payoff date or the down payment? If not, change either the monthly amount or the date, deliberately, rather than letting the goal drift.
• The system itself. Are the categories still the right ones? Is the tool still working for you? Are any automatic transfers out of date?

Traps that make reviews fail

• Skipping the review in a bad month. The month you overspent is the month the review is most useful. Skipping it to avoid the discomfort is how one bad month becomes three.
• Making it a trial. If a review turns into blame, especially between partners, people start avoiding it. Look at what happened, not who did it.
• Changing everything at once. Ten changes made on a burst of motivation are rarely sustained. Three changes, kept, are worth more.
• Reviewing alone when money is shared. If you share finances, both people should attend, even briefly. Chapter 4 covers how couples can run this meeting.
• Leaving without a decision. A review that ends without at least one written action was just a look at the numbers.