I hope you all are having a terrific Thursday. It’s going alright for me so far.
Today, I would like to start talking about reconciling your budget. This will be a two part series.
What does this mean?
It means that you are comparing what you project to earn and spend each month (the budget you will create at the beginning of each month) to the actual amount of money you earned and spent for that month (usually done at the end of the month or beginning of next month).
For all of the people that have taken Accounting or Bookkeeping classes, reconciling your budget is not the same thing as reconciling your checkbook every month. With this, you compare what you have recorded you spent versus what cleared the bank account.
Why should you do this?
- To see if you need to make an adjustment on your budget– Sometimes you might not budget enough for certain expenses (e.g. Personal expenses; Gas expense). This helps to see if you need to increase the budget amount for that expense or not. It also happens the other way around where might budget too much for a certain expense. In that case, you would have to lower your budgeted amount for that expense.
- To help create sinking funds for certain expenses that fluctuate from month to month– Let’s say you budget Utilities for $100 per month. In October the amount you actually spent on that is only $75. However, you spent $125 in utilities in November. In this case, you can save up the $25 you had left over in October to cover the overage of $25 in November.
- To see if you can make an extra payment towards your debt– Reconciling my budget every month has helped me pay off my student loan quicker than I thought. If I had extra money, I would put a portion of towards what I owed on my student loans. Because of this, I was able to pay off my student loan in full in July.
- To start scrounging up money for upcoming holidays- Thanksgiving, Christmas, and other holidays that celebrated during that time of year are about to be here as soon as we know it. Using extra money to save up for those events will put less of a hurting on your bank account when they come.
How do you go about doing this?
First, you need to keep track of how money came in and how much money came out of your personal banking accounts.
How can you keep track of the money that you get each month?
- By keeping copies of the deposit slips each time you go to the bank to deposit your paycheck or other money that you have earned.
- By keeping copies of pay stubs or logging into your online bank account and seeing how much was deposited into your account if you get paid through Direct Deposit.
How can you keep track of what you have spent each month?
- By keeping receipts of purchases you have made (e.g. Groceries; Personal Needs)
- By keeping copies of bills you have paid each month (e.g. Utility Bill)
- By keeping copies of payment confirmations for payments or purchases you have made online (e.g. Paying your phone bill online)
- By keeping emails of automatic drafts some companies you pay bills to give you (e.g. E-mail of an automatic draft coming out of your bank account for a student loan payment)
Now here’s a couple of tidbits of advice when you are doing this:
- Get a folder where you can put all of your documents of what you have earned and spent (look at the last 2 paragraphs to see what I’m talking about). This will prevent information from getting lost. I’m awful at losing receipts sometimes if I don’t use a folder.
- Find a place to record this information (this will help you with the next step we will discuss tomorrow)
-The best places to do this are in a notebook; computer spreadsheet software program (e.g. Excel or Google Spreadsheets); a check register; or accounting software (e.g. Quickbooks; Quicken; Microsoft Money).
-When recording this information, write down what actually went into your bank account (if you are using pay stubs write down the net amount, not the gross amount) and what you actually spent to the appropriate category it belongs to.
Tomorrow, we will discuss how to record what you have earned and spent and how to do the actual reconciliation of your budget.
If you have any questions, please let me know.
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Thank You and Have A Great Day