Budgeting Basics - Step 6 - Adjusting

When you completed Step 5, you had an estimate of your annual income and outflow, how much money you bring in and how much goes back out again.

If your income was higher than your estimated spending, things look pretty good. But check your estimates. Did you forget a category? Did you estimate too low?  Did you include expenses you know will occur but not exactly when or for how much, like car repairs (make an estimate for the year, even just a few hundred dollars) or school supplies?

If your income was lower than your expenses, that's not surprising. Now we need to fix that!

One way to fix that is to look at those discretionary or variable expenses and see if they can be reduced. But don't be unrealistic! You can't budget $20 a year for clothing for a family of 5 unless you are a super thrifty clothes shopper who receives lots of hand-me-downs. 

Another way to get your spending in line with your income is to look at some of the bills we listed to see if some of those can be reduced or eliminated. Do you need all the insurance coverage and other options that are deducted from your paycheck? Would it make more sense for you to pay cash for some things or purchase them from a different source than to pay the price for coverage through your employer? Only you can determine that for each item on your list.

You must get your spending estimate down below your income estimate, and you must stick to that spending estimate (or less). If you spend more than you earn, you will experience financial disaster. In fact, we have to have some leeway, some excess income (no matter how small) because we must save money to cover the inevitable large expenses that occur sporadically.

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