Things don't always turn out the way you expect them to, whether in life in general, in your business dealings, or in your personal finances. For example, you might have a budget that features your carefully calibrated spending goals, but that doesn't mean you'll always meet those goals. Here's how to make sense of your actual spending vs. your budgeted spending.
The small picture
Imagine, for example, that in an attempt to rein in your spending and be able to save more for your retirement, you've drafted a budget laying out your new spending limits for various categories such as food, transportation, housing, clothing, utilities, entertainment, etc. Let's say that you've budgeted $150 per month for your cable, TV, and landline phone bill. But when you review your bills over the past month, you find that your last bill for those items was for $175.
What you've got there is a "variance" of $25. Your actual spending on that category has strayed from your budgeted spending by $25. Now that you noticed it, you can do something about it, such as calling your cable company and seeing what can be done to lower your bill. You might just need to sign up for some new bundle of services, or perhaps you'll need to drop a few bells and whistles in your account, such as a premium cable channel and one of your DVRs.
The big picture
A single variance is good to spot and correct, but it's even more important to regularly review your actual spending in all categories, comparing it with your budgeted amounts. If several items feature overspending variances, it likely means that you're living beyond your means and your savings might suffer.
If you have several variances that feature under-spending, then you might want to reconsider how much you've budgeted for those items, as you may be able to get away with budgeting less for them and more for other items.
The best budgets are the ones that work because they're reasonable. They help you meet your financial goals without being so draconian that you have trouble sticking to them.
In the business world
It's worth noting that differences between budgeted spending and actual spending also pop up in the business world. They can have similar effects as in your personal finances, with a company that has many variances spending more than it really should and becoming less financially healthy.
And, as with our personal finances, if a company spots many variances, it can present a chance to reassess overall spending in order to get it under control -- perhaps via a more workable budget or via strategic spending cuts.
However you go about it, it's smart to have a handle on your personal spending, so that you don't live beyond your means and short-change your future.
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