When To Re-Do Your Budget

This article discusses when you might want to re-do your personal or business budget, with a focus on household budgeting.

I generally suggest people do monthly and quarterly budgets. If you’re a business you should also engage longer-term 1, 3, 5, and 10 year plans.

As part of constructing the budget it is important to look at past budget performance. Basically, if you spent more than you budgeted consistently, then you need to raise your expected expenditure for that cost category. For example, if I budget $100 for gas each month, but I have spent more than that each month over the past 3 months, then I should probably raise that budgeted amount barring special circumstances.

I call this the 3-strikes rule and I honestly don’t have much data to back up the claim that it’s particularly valid, but it is a rule of thumb that I use myself. If my budget is off for 3 reporting periods in a row and I don’t have a valid reason to claim an exception to the rule, then I re-do the budget with a higher expected expenditure.

Even though I do a monthly budget, I check my cash on hand at the end of each week. It should be about where I expected it to be or else it counts as a strike against my 3-strikes rule. If I am off for 3 weeks in a row then I re-do the budget, even if I am in the middle of the month. Something is wrong and I shouldn’t wait until next month to fix it.

The 3-strike rule cuts across monthly budgets for me. If I plan one month and I am on track for 3 weeks but things get off track on the last week, I do my new monthly budget as normal at the end of the 4th week. If I get 2 weeks into the new month and that same expenditure category is off, then I re-do the budget mid-month.

What if my particular expenditure categories are on track, but my total expenditure keeps getting off track? That means that I need to increase the budget of my ‘other spending’ category. Life throws weird stuff at us and frankly it’s not realistic to categorize everything, so I recommend an ‘other expenses’ category in every budget.

Below is a list of some reasons why my cash on hand would be where it is compared to the expected cash on hand:

  • [as expected]
    • performing as planned
  • [low cash on hand, nonrecoverable]
    • overconsumption
    • emergency – health
    • emergency – pet
    • emergency – property damage
    • unexpected price increase
  • [low cash on hand, recoverable]
    • unexpected reimbursable expense
    • late income receipt
    • bill or debt paid early
  • [high cash on hand, nonrecoverable]
    • underspent
    • unexpected income receipt
    • unexpected price drop
  • [high cash on hand, recoverable]
    • credit substituted for cash
    • delayed expenditure

What would be an example of a special case where I don’t need to worry or re-do the budget? Examples would be those items called ‘recoverable’ above. For example, if you paid a bill early then you should expect your longer-term budget to balance, even if you have lower-than-expected cash on hand this week.

On the other hand, nonrecoverable expenses should not be expected to eventually balance. In particular, don’t assume that you can just correct your own overconsumption. It’s easier said than done. If you overconsome one or two weeks in a row, I don’t think that’s grounds to permanently alter your budget. If you try for 3 or more weeks and you can’t break the spending habit, you should probably adjust your budget to be more realistic. Again, this 3-strikes rule is arbitrary but it has worked for me. I would love to see real data for a more precise rule though.

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