How to make adjustments to your budget

I write the Better Budget blog to help you get better with your finances in general, but the core of every financially healthy person, family, organization, etc. is a well written budget. There are a lot of ways to do a budget. I teach the envelope method. I’ve been using it for years and I think it works the best out of any other way.

Something you should periodically do with your budget is making sure your numbers are accurate. For example, if you budgeted $40/month for gas, are you really spending that $40/month? Another example that a lot of people can relate to is those with variable income (income that changes from month to month). Is your monthly budget more, or less, than your net monthly income (i.e. your take home pay)?

There’s a couple ways you can check this. Let’s first look at an individual budgeting envelope, such as gas. I had been budgeting $30 a week for gas since December 2018. I do my budget weekly, but this can also be applied to other types of budgeting, such as bi-weekly or monthly. Anyways, I constantly found my envelope going negative on that budget by approximately $5-$15 every week. This was the first indicator that something needed to change.

Now, I had to figure out what my new budget should be. The best way to figure this out is averaging. For me, I gathered all my gas purchases between today and January. I just looked at my envelope history on the budgeting app I use, but you can also look at your bank account transaction history or receipts. What I found was I averaged about $43 on gas per week (well, my wife and I averaged). It makes sense. Gas has been going up in price and my wife got a job that’s about 45 minutes away from where we live. So, I adjusted my weekly gas budget to $45. We now stay within budget every week, as long as we don’t do any extra traveling!

Another way you might need to make an adjustment is your weekly budget amount. This weekly budget amount should be about 98.5% of your net income. This sounds complicated, so let’s break it down. You can figure out your net income in a couple of ways. First, if you’re on salary with a fixed monthly income, your income is what’s deposited into your bank account every pay cycle. If you’re on a changing income, you can either approximate it for the hours you typically work, or average your last 5-10 pay stubs. So, if you typically work 40 hours a week and get paid $20 per hour, then your average net pay per month would be approximately $2426 (40 hours * $20 * 52 weeks…divided by 12 months…multiplied by .7). The multiplied by .7 gives a very good approximation of your take home pay (i.e. your net pay) after taxes, insurance, social security, 401k contribution, etc.. The best option is to average your pay stubs if you have them. Take 5-10 pay stubs and average your take home pay from all the stubs. Then, this number is your average net pay per pay cycle. 

Now that you have your net pay, multiply it by .985. Someone who makes $41600 per year would have an approximate net pay of $29120. Therefore, the yearly budget should be $28683 ($29120 * .985). Then, use that number for the number of budget cycles in a year. If you monthly budget, then you’ll divide it by 12. If you do weekly, 52. If you do bi-weekly, 26. I do weekly, so I would divide $28683 by 52 to get $551. That’s the magic number. That’s how much your budget should be per budget cycle.
 
​After all that, we have what your budget should be and we can make the adjustment if needed. In my case, after I did all the calculations above, I actually found that I was a lot under budget! This meant I had more money to budget. For example, if my weekly budget was $551, I found out I was actually only budgeting $525. So, I found $26 more I could budget per week. That’s almost $1352 yearly! It’s a great day to be under budget and find out you have more money. It’s an even better day if you’re over budget and you have to reduce. It’s better because you found out before you overspent. You adjust your budget according. Cut from a couple areas to get back to your budget (e.g. cut $20 to get from $571 to $551). Check your budget and see what adjustments you need to make!

---

​If this seemed like a lot to take in, please let me know! I want to refine my budgeting method to make it easy for you to understand and do. If there’s any way I could improve it or better explain it, please reach out to me. I would love to help you figure out your numbers to. Just contact me, and we’ll get your budget rolling! As always, thanks for reading Better Budget and I hope your finances get better every day!