You want to set both monthly and yearly budgets. Why?
A monthly budget matches the way many lenders, utilities and landlords bill. In this budget you’ll include recurring expenses, such as groceries, cell phone bill, dining out and gas for the car.
Since most of us are paid monthly, or a few times a month, it’s a great way to determine if you’re spending less than you make and paying the most important items first.
I recommend you keep index cards or a small notepad with you to write all of your expenses down immediately when you buy a vending machine snack, eat out or any time you part with money during the day. If you have never done this, it is a very useful exercise to track where your money goes each month. Almost all of us have spending leaks that can add up when multiplied week after week for 12 months.So why do you need a yearly budget too?
It is a way to budget for one-time predictable expenses throughout the year. You know you will need to renew your car tags, or that you want to buy presents for family and friends during the holidays. By looking at your predictable expenses, you can set aside money for 1/12th of the cost.
Looking at spending plans from a yearly perspective also helps us get a handle on even longer term goals. How much can you save for retirement? If you skipped eating out for two years, would you have enough saved to take a dream vacation or pay off your credit card balance?
By creating both a monthly and yearly budget you will be able to see how the spending decisions you make every day determine your financial future.