How a Mid-Year Budget Adjustment Can Build Wealth

Key Takeaways
  • Your budget should be a living document that you adjust as things change.
  • A mid-year review allows you to make adjustments to the budget to improve its accuracy and relevance.
  • You can evaluate your spending using the time-lapse or month-by-month strategies.

The purpose of a budget is to serve as a guide for spending. You establish benchmarks in each major spending category and then review the budget periodically to determine if your budget is accurate to your actual spending habits. Too often, a budget becomes hypothetical,and after its creation,it sits in a file on your phone or laptop, never to be reviewed until the following year.

A mid-year review can serve as an important tool because it evaluates costs and spending in the previous six months,allowing you to move forward with a more accurate and workable document. When completing your review, consider the following factors:

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  • How accurate does your estimate match up with actual spending? If you are consistently over budget in one area, you can increase that line item. Then look for ways to offset those higher expenses by reducing your allocation in another category so your budget balances.
  • Are there sub-categories that need recognition? A deeper dive into your budget could uncover sub-categories that should be represented in the budget. For example, you might add a sub-category for children’s sports rather than putting those costs in the general entertainment budget.
  • Review what is working and what’s not. Your budget should be a helpful tool that guides spending. If it’s not, then it’s time to adjust how you review and manage your budget. Online tools and apps can simplify the process making it more of a weekly and monthly guide instead of a periodic exercise that takes time without delivering value.
  • Does short-term spending align with your long-term goals? One of the purposes of a budget is to focus on long-term needs with a short-term spending plan. For example, if your five-year plan includes getting out of debt, your budget should consist of a category earmarked for reducing debt a little at a time. Long-term goals could also include starting a business, building retirement investments, savings for your children’s college, future travel expenses, hobbies, and other pursuits that require a substantial amount of money to achieve.
  • Look ahead to the rest of the year. Given the events of the past six months, have anticipated or monthly costs changed. Adjust the budget going forward using these criteria.

When completing a mid-year spending review, you can take one of two approaches:You can review the pace of spending in relation to the time elapsed or a month-by-month analysis of actual expenditures versus the budgeted amount.

A time-lapsed review is easier to calculate. To review,you compare the pace of spending with the time elapsed on an annualized basis. You can determine the amount spent in each category by the percentage the of the year passed. If you were over budget one month but under budget the next, you could still be on track from a budget perspective.

For example, if the food budget was $1000 each month, the annual budget for food is $12,000. To determine where you are, divide that number by the percentage of the year passed. At the end of June, you would expect to have spent $6,000 if you accurately calculated food costs.

A month-by-month review is more granular and can help uncover spending patterns that affect your ability to stay on track financially. This strategy compares spending by category each month to discover patterns. You can identify which months you were over and which you were under budget.

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Which Budget Strategy Should You Use?

Both budget strategies will tell you if you are on target for the year. Which one is best for you? It depends on the type of budget you create.

Every budget has fixed and variable expenses. Variable costs include spending on food, electricity, transportation, and entertainment. You might have significantly different expenses across months in each of these categories. If your monthly budget reflects these differences, then a month-by-month review would help you see if you stayed true to your spending goals.

However, if you prefer to give the same dollar amount to each category every month, knowing that some months you will be over and other months under, then the time-lapse will help you gauge your success.

  • How often should I review my budget?

    Ideally, you would check your budget monthly and make the appropriate adjustments. The more frequently you review your spending plan, the more of a guide the budget becomes.

  • Why is a budget review important?

    Without a review, the budget is just a spending plan. The assessment aligns actual spending with the proposed budget. Then you can adjust either the budget or your spending habits to increase its accuracy.

  • What is the purpose of a budget?

    When used correctly, your budget becomes a financial guide that allows you to spend money based on your highest financial priorities. It can also curb spontaneous spending that does not directly support your longer-term financial goals.