Budget For The Year, Not The Month
June 14, 2011 | Alliant Credit Union
If you're like most people, you create monthly budgets and are often surprised with unplanned expenses that you completely forgot about. Monthly budgets can be quite frustrating and a struggle to keep due to predicting spending in a too small amount of time period. Is there a way to create a budget that is less frustrating and that you can keep? Yes!
Studies have found that people who made annual budgets, instead of monthly budgets, were better able to predict their spending. The reason is that people tend to underestimate monthly expenses and overestimate annual expenses due to being less confident with their estimations and thus, adjusting the numbers upward.
The benefits of an annual budget are that it forces you to:
- Factor in periodic expenses like your car insurance that is paid semi-annually and fees and dues and taxes you pay only once or a few times a year
- Be more realistic about unexpected expenses that may include car repairs, home improvement needs and medical expenses
- Consider and incorporate seasonal costs, such as summer vacation, holiday travel costs and birthday and holiday shopping expenses
- Think about future needs as you may want to purchase new car or home next year, start a family or send your child to college
- Evaluate your current financial situation to plan and prepare for your future wants and personal and professional goals
We're not going to lie to you, creating your first annual budget will be challenging. However, after inventorying all of your expenses and future plans, you will find that it's completely possible. You'll also find it more rewarding due to keeping your budget.
Here are some steps to help get your annual budget started:
Figure your monthly take home income and multiply by 12 to get your annual income.
Figure your fixed weekly, such as what you spend weekly for lunch at work or filling up your car with gas, and monthly expenses, such as rent, utilities and all other bills you pay monthly. Multiply your weekly expenses by 52 and your monthly by 12. Then add the two totals for your yearly fixed expenses.
Inventory your occasional expenses, such as your car's permit parking sticker cost and insurance. Add these totals to your fixed expenses from Step Two.
Use your imagination and start thinking about what potentially may go wrong this year. It may be good to include car, home and appliance repairs, extra utility costs for extreme hot and cold weather, health insurance co-pays, etc. Make a list of the estimated costs and add the total to the total in Step Three.
Now that you planned for the worst, it's now time to plan for the fun stuff - woohoo! Create a list of all the estimated costs for vacations, birthdays, holidays, nights out with friends, weddings, etc. Add this total to the total from Step Four.
Now subtract your total expenses, Step Five, from your annual income, Step One. Did you get a negative amount? If yes, you'll need to redo Step Five and lighten up on the fun. Your total expenditures should be less than or equal to your yearly income. If your answer is positive, move on to Step Seven.
Divide your total by 12 to get your monthly budget. For a weekly budget, divide your annual budget by 52. Even though your overall budget is annual, cutting it down to a month or week will help give you a better understanding of your income and expenses to better manage your spending.
Sources: USNews.com, thenest.com, GetRichSlowly.org
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