You hear it a lot. You absolutely need a personal budget. Every financial expert will tell you. There are multiple articles on this very site that help guide you towards building and maintaining a successful budget. You can even download multiple apps to help you out. It’s important! How will you ever feel in control of your money if you don’t have a clear idea of where it comes from and where it’s going? Having a budget is an important (and necessary) first step to having your finances in order. However, it doesn’t end there. Once you have your monthly budget habits running smoothly, you should take it one step further. We recommend that you take the time to “close out” your budget at the end of every month. Or, at the very least, once every year.
Wait, What Does It Mean to “Close Out” My Budget?
Most people understand the concept of a budget. For example, you might allocate $300 per month for groceries, $250 per month for driving expenses (gas and insurance), and $100 per month for your cell phone bill. And so on.
However, life isn’t always that perfect. When was the last time your grocery bill came to $300 on the dot? It was probably more like $293.17 or $311.78. Same with your driving expenses or phone bill — especially if you put on some extra miles last month or went over your data limit. Life happens, right? It’s not always predictable.
To close out your budget simply means to compare the amounts you expected to spend against what you actually did spend. Each line in your budget will end up having a surplus or a deficit. Maybe you’ll have a few categories with a close out number of zero dollars too. If so, great job with your budgeting!
Analyze Your Close Out
The ultimate goal of closing out your budget is to determine where you might be over- or under-spending. For example, you may budget $300 a month for groceries but actually spend an average of $350. Then you wonder why you’re short on money at the end of every month. If you’re running a deficit in too many areas, your budget isn’t going to be very useful at all.
On the other hand, you may discover a surplus is some categories. That means you can adjust your budget accordingly. You can add the surplus dollars to a category with a deficit. Better yet, you could allocate them to something even more beneficial — paying of debt, adding to your savings, or use it for investing. This might help you avoid the pitfalls of thinking you “found” extra money and spending it frivolously.
Consistently closing out your budget doesn’t just allow you more control over your money. It also helps you notice any discrepancies or mistakes. For example, maybe your internet bill is automatically paid every month with a credit card or a direct withdrawal from your checking account. It’s so convenient that you probably don’t even think about it. But would you notice if your provider suddenly increased their prices? Or made a mistake on your bill and overcharged you? What about if you went over a bandwidth cap or ordered a few too many on-demand movies while stuck at home?
When you close out your budget, those types of discrepancies will stand out like a sore thumb. You can then use that information to solve whichever problem needs fixing. Maybe you need to contact your internet provider about a cheaper plan. Or ask them to fix a billing mistake. Perhaps you just need to do a better job of managing your data use or PPV movie habits. Whatever the case, closing out your budget will show you exactly where you money is going.
The Last Word
Be diligent with your budgeting. Yes, that $5 you spent at the Starbucks drive-thru counts. So does that cute shirt you ordered online to “treat yoself.” The more honest you can be with yourself, the more you’ll know about your financial situation. When you close out your budget, you’ll get a clearer picture of where you’re overspending and where you’re not. Use that information to tweak your budget.
After a few months of closing out your budget, your monthly ledger should be in top-top shape. Sure, you still won’t ever spend exactly $300.00 at Whole Foods. But you will know if your grocery budget is more-or-less accurate. Same goes for all your other expenses too. Every successful business makes a point to close out their budget on a regular basis. You should too.