We all know that budgeting is the key to managing our money. But have you ever considered how an annual budget might work better than a monthly budget?
Tell me if this is how budgeting usually goes for you …
You take your annual income, divide it by 12, and then make a goal to not spend over that amount each month. Things might go well for a little while. But then you find that you’ve over-spent by $500 because of a bill you weren’t expecting. Then the next month its $1,000 more than you anticipated.
Perhaps you’d like to buy a new car, but you’re unsure of how much you can actually afford each month. Or maybe you’d like to boost your 401(k) savings rate. But again – how much extra can you actually put aside without breaking the bank?
This was exactly how budgeting used to go for me every month. Then one day, while at work, we started going over the annual budget for the next year. There it was, right in front of me … a spreadsheet with exactly what the company planned to spend and earn for the entire year. It was a complete financial picture of what was going to happen! No surprises or slip ups. Pick any month, and you could see just how many planned expenses they had and how much cash they had to cover it.
That’s when it hit me … As the family CFO, I need to do the same thing! I need to setup our family budget like a business that plans to succeed! And that means we need to get a complete picture of how our finances will look over the course of the whole year, not just month to month.
Shortly after that, I did just that. I made a list of all our expenses, carried them forward throughout an entire year, and then compared it to our income to determine just how much money we “really” had available to spend.
It’s a strategy that’s been working great ever since! If you have any doubts, here are a few reasons why you’ll want to consider an annual budget vs monthly budget.
With a monthly budget, there are several expenses that get missed because you simply don’t think about them every month.
Consider the following heavy-hitters:
- Christmas gifts
- Birthday gifts
- Vacations / travel
- Tax payments
- Major auto maintenance (like spending $800 for new tires)
- Minor auto maintenance (like oil changes)
- Car insurance
- Vehicle registration
- Property taxes and insurance (if not already covered in your escrow)
- Annual vet check-ups / registration (if you have pets)
Even though most of them happen only once or twice throughout the year, when combined, they could add up to thousands of unplanned dollars. This is why annual budget works better. With an annual budget, you successfully account for each and every one of these miscellaneous but straining expenses.
With a monthly budget, it’s almost impossible to properly capture these periodic expenses. Unless you’re incredibly, super disciplined by setting aside a few hundred dollars per month (which most of us aren’t), then it’s not going to happen.
Expenses aren’t the only thing that might get missed with a monthly budget.
If you budget your money on an annual basis, you may also find a pleasant surprise: 2 extra paychecks!
Yes, for most people who get paid every two weeks, they can plan to receive 26 paychecks per year. But with a monthly budget, we falsely assume that we will only ever receive 2 paychecks per month, or 24 per year. In reality, that means we’re not accounting for 2 whole paychecks!
Anyone enjoy a nice Federal Income Tax refund? What about profit sharing or an annual bonus from your job?
Again, with an annual budget, you can capture all of it. This additional income will boost your overall cash flow, leaving you with more capital to work with. That gets you closer and closer to your goals!
Spotting Negative Trends Early On
One of my favorite benefits of budgeting annually is the fact that I can spot negative trends early on.
By having all my income and expenses laid out over a 12 month period, I can see exactly how much money will be in my bank account at the end of every month.
In a few months will my checking account get close to zero or in the red?
Good catch! Months before the damage is even done, I can make some adjustments to my spending that will put us back on the right track.
Building in Goals
The other thing I really like about annual budgeting over monthly budgeting is the fact that I can work in specific goals and see how they will influence our overall cash flow.
Remember those examples I gave earlier with the new car and 401(k) increase? Those were real goals (among many others) where I could add them to our annual budget and see how it affected the balance every month. By working with realistic estimates over the course of the whole year, I could see just how much we were able to afford.
If you budget your money, that’s great. But consider how an annual budgeting might be better than monthly budgeting over the long run. By getting the complete financial picture, you will properly plan for all your income and expenses … even those that happen only once throughout the year. But on top of that, you’ll also be able to better build in your goals, anticipate your cash flow, and set yourself up for financial success.
Readers – Which do you prefer between an annual budget vs monthly budget? What successes have you had, and what strategies do you use to make it work?