How Do I Tinker with My Budget or Make Changes?
This is where the sovereign aspect of managing your cash flow becomes more apparent. First off, there are 2 approaches to getting feedback from your budget. The first one is to make a budget of what you want to spend for the next period or year, and then track what you did over the period or year and see if you are “on budget”. The other method is to track the spending first without expectations and see how the summary looks before deciding what should be changed. Does it matter which method you use? You should use the method that works best for you. If you like discipline, diets and rules, the first method would appeal to you more. If you have a lot of guilt about not meeting the budget or are not sure what you should spend money on, the second method would be more appealing. It may also depend on the state of your finances: if you are going into debt, you may need to change your spending right away and it wouldn’t make sense to wait to track first. You will eventually arrive at the same destination in that you created the budget and then look at it to see how it turned out. This will be the basis for making changes.
When consider tinkering with the budget, zoom out from the details and ask the larger questions. There are 3 main outcomes that can occur after looking at your budget. You may have extra money at the end of the budget period, you may be short of money or there is a third option which is that your budget revenues are equal to your expenses or is “balanced”.
Extra Money from Your Budget – Short Term Surplus
If you have extra money from your budget, the question to ask is: Is this sustainable or is it likely to be repeated next year if there are no changes to your inputs? Is this the result that you expected? If you don’t have expectations yet because it is your first time doing a budget, this question will likely be asked after doing it 2 or 3 times. If this budget result is sustainable or it is very likely that this will happen each year, then you can go to the set of questions below. When you zoom out from this result, there are 5 main areas where the money can be applied: paying down debt, spending today, saving for a future expenditure, building the reserve fund or investing the money. The money can be directed towards each of these goals or a combination of them depending on what is the most important.
If there is uncertainty as to whether this budget result is sustainable, then ask yourself if you have enough reserves or credit to balance your budget or make ends meet in any given year. If the answer is yes, then you can direct the money to one of the 5 options: pay down debt, spend, save, invest or add to reserves.
Reserve means that you have cash available for you to put into your budget. Credit means you are using a form of credit (credit cards, line of credit, etc.) to balance your budget.
Having a Shortfall on Your Budget in the Short Term
If your expenses exceed your income or revenues, this is called a shortfall in your budget. You will need some extra money aside from your annual income sources to pay for your expenses. The same questions can be asked as for a budget surplus. Is it sustainable or will it likely be repeated? If the answer is yes, do I have enough reserves or credit to keep the budget balanced this year? If I do not, the options are to sell assets or increase credit.
Longer Term Questions if the Situation Stays the Same
Extra Money from Your Budget – Expected Surplus Long Term
If you have a budget surplus and it is likely to keep on occurring, then you switch your focus to your longer term goals. The first question to ask is: Am I on track with my long term goals and will my current situation get me to where I need to be over time? If the answer is yes, your budget can be left as it is. If there is something missing, the next question is: Can I increase my income or reduce my expenses so this scenario will be more aligned with my future goals or expectations? The focus of this question is for income changes or expenses that you can control quickly – either tweaking income for a side hustle, increased yield on investment, raising rent on your properties, or reducing the discretionary expenses.
Having a Shortfall from Your Budget Long Term
If you have a budget shortfall, the same questions can be asked as in the surplus situation. If the shortfall is temporary, you may be on track to reach your long term goals and nothing needs to be done to your budget. If you have a repeated shortfall, this eventually leads to a shortage of money and the same remedies can be asked: Can I increase my income or reduce my expenses so this scenario will be more aligned with my future goals or expectations? The focus of this question is for income changes or expenses that you can control quickly – either tweaking income for a side hustle, increased yield on investment, raising rent on your properties, or reducing the discretionary expenses.