Yearly and Monthly Budget Planning Methods You Should Know
Financial management is a part of your daily life. The question is whether you are managing them wisely or poorly. It is no secret that Americans are not in good shape financially. Student debt and other consumer debt continues to grow, most people have nothing put away for retirement, and many people live paycheck to paycheck. And sadly, less than half of all Americans make the wisest financial decision: Create and stick with a budget.
If we want to change our finances, we have to take control of them instead of letting them run rampant. The best way to start taking control is to create a budget, but for various reasons, people simply do not do it. Some do not know how to do it or how to start, some do not think they make enough money to budget, and some just do not want to deal with it.
First, I’ll say that if you have any money at all coming in, creating a budget is important. It is a way to tell your money where to go. And, if you make a budget, you might see that even a small income goes much farther than you expect.
Now, for those who do not know where to start or feel like it is too much work, don’t worry. Here we share five budget planning methods that range from simple to more advanced, depending on your goals. Get ready to take control of your money by building a budget today.
Budget Planning Methods
There are a ton of budget planning methods available for personal and business finances. In truth, though, the method you use to manage your money is just a tool. Actually using the tool is the work. It is important that you find the tool that works best for you so that you can stick with it. Below are just five budget planning methods, but they do cover the majority of financial management.
50/30/20 Budget
The 50/30/20 budget is one of the simplest budget planning methods out there. It goes like this:
50 percent of your income goes to necessary expenses
30 percent goes to discretionary spending- things you want to spend money on
20 percent goes to saving (and debts, when you have them)
The reason it is one of the simplest budget planning methods is that you simply split your money according to a fixed percentage. The only real thinking you have to do is figuring out how to split each category. This method is especially great for the beginning budgeter due to its simplicity.
The biggest problem with it is that the percentages may not cover enough. For instance, if you are on a very low income, 50 percent of it may not be enough to cover your expenses or 20 percent may not help you save enough. Starting with this method may still be a good idea for many, though.
You can always tweak it as you see fit. You might need to put 70 percent toward necessary expenses, 25 percent to savings, and 5 percent to discretionary spending. You can figure this out as you go along.
Problem Solving Budget
This one is actually one of the simplest budget planning methods, too. This is the type of budget you create when you need to solve a financial problem. For instance, you might discover that you are spending more than you make and that you live off of credit each month, so you dig in to create a strict budget. When you do dig in, you notice that you are spending a ton of money on junk food. The problem-solving budget would help you cut out or cut down on junk food so you could save more or get out of debt.
Planning Budget
The planning budget is probably the best of the budget planning methods if you are hoping to save for something, especially since that is the whole point of this budget. Most people use this type of budget to save for moving, buying a house, buying a car, or going on vacation.
To create this type of budget, you determine how much your goal will cost and how long you have to save for it. Divide the cost by the number of weeks you have to get the total you need to save each week. Then, you dig into your current budget and spending to figure out what you can cut down or out.
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Let’s say you want to save $1500 for a vacation and you have 12 months to do it. This means you need to save $31.25 per week. If you already have $31.25 you can spare, you really do not need to do anything. However, if you are really strapped for cash, you will need to dive into your budget. You might:
Cut $10 out of your fast food spending each week
Carpool with a coworker to save $10 each week
Start using coupons or a coupon app to save $11.25 on groceries each week
Some savings goals require you to put away a lot more money each week, so your savings plan may need to go a lot farther. Either way, you can pluck away at multiple categories of your budget until you find the amount you need to save. That money can go to your savings account.
Envelope Budget Method
The envelope method is not hard, but it does require a little more work and discipline than many other budget planning methods. For this method, you need an envelope that is labeled for each category you spend money on, such as gas, groceries, and so on. You decide how much of your paycheck needs to go to each of those envelopes and on payday, you get the cash out of the ATM to spread out among your envelopes.
When you go to the grocery store, you take your grocery envelope with you and only spend what is available in the envelope. If you want something that is not on your list, you have to put something else back or you have to take money out of another category’s envelope.
Why does this method work so well? There are a few reasons.
First, we as humans as much more reluctant to let go of our cold hard cash than we are some theoretical money in the bank. This means that every time we want to spend some money, we are more likely to think it through and less likely to make rash decisions.
Second, when we physically watch ourselves take money out of one category to pay for something in another, it makes us stop and think. For instance, if you are at the grocery store and want to purchase an extra $10 in snacks but you have already reached your grocery budget limit, you will have to take that $10 out of another envelope. When you do so, it makes you realize that when you make that decision, you will have to work to make that money back up. It may not always stop you from doing it, but it does make you think a little more.
Third, you have a physical limit when it comes to what you can use. You can not overdraft your envelopes or charge something that you do not have the money for. Having a physical limitation tends to make us make smarter, more well-thought-out decisions.
We discussed here how to use the envelope method for spending, but what about your bills? You have a couple of options here. Some people take the cash for their bills out of their account and put it in envelopes, too. They then choose a day to get out and pay the bills. This is a good choice for people who do not mind going in to pay their bills, who are already running around town anyway, and for those who do not trust themselves with a card at all.
However, if you enjoy the convenience of online bill pay, you can still use the envelope budget for your spending and use your card for bills. To make sure that your money goes to the bills instead of you being tempted to spend it on other things, set up automatic bill pay for the money to come out of your account on payday. Or you could transfer your bill money to your savings account and have your bills come out of there instead.
Comprehensive Budget
The comprehensive budget is the big daddy of budget planning methods. It requires a great deal of time, work, and discipline. It also usually gives the budgeter much greater results than other budget planning methods.
The comprehensive budget is a complete and thorough overhaul of your financial situation. It means that you sit down, go through your budget one line item at a time, and cut down everything you can. As it attacks every single category your money goes to, it does take some time to sit down and complete it. In fact, you should expect to spend more than an hour.
It is also important to note that as it is one of the most involved budget planning methods, it will be easier for those who are familiar with the budgeting process. If you are new to budgeting, it will be a little more difficult. That does not mean it is impossible, but you might be better off starting with one of the simpler budget planning methods.
How To Set a Yearly Budget
When you are building a budget, it is always best to start with a yearly budget as it can act as an overall roadmap for your year. It is easier to know where to put your money on a monthly basis when you have a yearly budget.
Setting a yearly budget really is not as hard as it sounds. It is actually much easier than a monthly budget because it is simply an overview as opposed to a broken-down process. Here are some simple steps to do it:
- Gather Your Stuff
First off, you need to gather your stuff. This includes pen and paper, a calendar, a calculator, and some type of budgeting system- either digital or print.
- Write Down Your Yearly Expenses
- Any birthdays you spend money on
- Christmas
- Halloween
- Easter
- Vacations
- Oil changes and preventative maintenance
- Property taxes
- Anything else you can think of that is not a regular monthly expense
There are some things that do not happen every month. They may happen only once or a couple of times a year, which is why they are so easily forgettable. Before you go any further, write these down:
- Check-in With Your Goals
Take a look at your financial goals. Are you on track to reach them? Figure up the amount you need to put away this year for these goals.
If, for instance, you are hoping to save $10,000 for a down payment for a house in three years but you only have $2,000 so far, you might need to increase your savings goal for the year. - Decide On Any New Goals
Do you have things you want to add to your financial goal list this year? Maybe you want to pay off some of your debt or buy a new car. Whatever your goals are, be sure that you include them now. Do not forget to work on an emergency fund, too.
- Add in Regular Expenses
Bills do fluctuate, but you can usually get a pretty good idea of what you will spend over the year by determining what you spent last year.
- Make Adjustments
You may not know the exact amount you will make for the year, but again, you can get a pretty good idea by determining last year’s income. Will your income estimate be enough to cover your yearly budget? If so, you are good to go. If not, you have some work to do.
While everyone can benefit from using one of the budget planning methods above, you definitely need to put one of them in place if your yearly budget outweighs your yearly income. Choose one of the methods and get to work.
You might also find that you will need to increase your income somehow. The earlier in the year you can figure that out and get started, the better off you will be. You may need to find a whole new job or you may just need a side hustle. If either is true, start planning for it now so you can optimize the length of time you have to earn money.
Benefits of Monthly Budgeting
Monthly budgeting means turning your yearly budget into baby steps. Saving the $1,500 we mentioned earlier for a vacation sounds a little overwhelming. Saving $125 per month sounds a much more attainable.
To set up a monthly budget, you take out your yearly budget and determine how much of that money needs to go out each month. There is always a chance that you will need to make some tweaks here and there. That’s okay- it’s normal even. The point is to have a game plan.
Once you know what needs to go out each month, you can break it down farther to how often you get paid. One of the best budgeting tips I have ever received or shared with others is to break everything down as much as you can. Don’t think about how much you have to pay out each year or month. Those amounts can seem too large.
Instead, think about what that means each week. Sure, a power bill might be $300 per month, but think about it as needing to make $75 per week. $1,500 for a vacation is a lot, but $31.25 a week is not that bad. The more you can break it down, the less overwhelming it is.
Conclusion
Budgeting is a very important step toward gaining financial freedom and success. Without one, your money controls you and your life. With one, you can take control, reach your financial goals, build your wealth, and retire with confidence. If you want to get off of the paycheck to paycheck cycle, you have to change your finances, and creating a budget is the first step. Take some time today or make an appointment with yourself this week to get started. You will thank yourself when you experience the results