How to Create a Weekly, Monthly, and Yearly Budget for Yourself
Now more than ever, it’s crucial to keep track of your spending. Here’s how to create a budget that works for you and your family.
by Sherry Hao, Controller at U.S. Money Reserve
Budgeting: It’s a word that can often strike fear and loathing into the hearts of anyone considering their finances. Though it’s often associated with restriction, budgeting is an essential part of managing and securing your family’s future, and it doesn’t always have to mean saying no. In fact, budgeting can be freeing because it helps you manage uncertainty in uncertain times. While setting a budget can seem somewhat boring, uncomfortable, and restrictive, in both fat and lean economic times, it can help you achieve your goals, keep your family safe, and create real stability.
Here’s how to start creating a weekly, monthly, and yearly budget for yourself.
Why Budgeting Matters
There are plenty of reasons that budgeting is essential, and it’s particularly crucial in uncertain times. Just like regular goal setting, a budget can help you not only manage your finances but actively grow them and provide stability and safety for you, your family, and your future.
First and foremost, budgeting allows you to keep your focus on your long-term and short-term goals. Want to save for your kid’s college tuition? You need a budget. Want to buy a house or go on a vacation? A budget can help. Setting and sticking with yearly, monthly, and weekly budgets can help you plan for unexpected expenses, and it can help you get focused on what matters most in your life. Setting priorities for saving and spending can set you on the path to making your dreams real.
Budgeting also helps keep you from overspending — or spending future earnings in the form of debt. In 2019 the average credit card debt was more than $6,000 per cardholder, according to The Motley Fool. While that is down slightly (0.2%) from 2018, it still represents a substantial financial burden, and many people don’t realize that they are drowning in debt until it’s too late. Setting a budget can help prevent that.
Setting a budget and sticking to it can also help you prepare for emergencies. As we have seen with recent events, the world can be a scary place, and having some form of backup plan can bring you and your family peace of mind. Having cash on hand, should you need a safety net if you lose your job, get sick, or have an unexpected accident, can mean the difference between sleepless nights and a comfortable life.
Figure Out What You Earn and Spend First
The first step in creating a budget for any time period is to take a good look at how much money comes in and how much money goes out on a regular basis. The more information you can gather, the better. It’s best to start broad and get more narrow, so start by looking at a period of a year and get all the information you can.
The best way to start creating a budget is to gather all your paperwork and information in one place. You can use a wide variety of tools to do this. It doesn’t matter if you prefer to work on paper or if you really like to use spreadsheets, but it’s crucial to find a tool that works for your needs when you start creating a budget. Plenty of online systems can help you get started with a budget, too. Companies like You Need a Budget and Mint offer systems to connect your bank accounts, credit accounts, and other sources of debt and income into one easy-to-see and -use platform.
Once you have figured out all your incoming and outgoing finances, split your expenditures into two categories: fixed and variable. Doing this will help you see where you might be able to cut or reduce expenses so you can save for future items or goals. Variable expenses are the kind of things that can vary from month to month. Things to include in variable expenses are groceries, gasoline, eating out, and any form of entertainment you might enjoy. Fixed expenses are things like car payments, mortgage payments, rent, student loan payments, insurance, and internet service. These are expenses that don’t change and that you must pay each month to keep your accounts in good standing.
Start with a Yearly Budget
Once you have gathered all the information about your financial house, it’s time to start creating your yearly budget. Yearly budgets are the broadest budgets you set to get a good idea of where you are right now and where you want to be in the future. They give you the big-picture perspective, which is crucial when setting goals.
Think of a yearly budget like a map of the entire United States. Looking at it gives you an idea of where the major cities are, what the landscape looks like, and what roads lead from point A to point B. A yearly budget is a good overview of the state of things, too, and it allows you to see where you might be able to trim expenses in order to hit your goals.
To set a yearly budget, take all the information you gathered initially and figure out the totals for a period of 12 months. That means taking your monthly earnings and monthly debts and multiplying them by 12. Once you’ve done that, add in any quarterly or infrequent obligations you might have — consider things like car insurance that you have to pay every six months, any quarterly tax payments you may need to make, or birthday and holiday expenses that tend to sneak up on you. Add those into your debt total, too.
Once you’ve included the infrequent costs, it’s time to start playing the “what if” game. Consider things that could go wrong and give them a monetary value. What if you have a family member who gets sick and needs medical care? What if your car breaks down, and you need repairs? What about that annual car registration? These are your rainy-day costs that should be taken into consideration when you’re creating a yearly budget.
It’s also important to include costs for fun things like vacations you want to take and things you might like to purchase in this step, too. This will help you get a better idea of how much you need to meet your long-term goals.
In general, the best rule of thumb is to utilize the 50/30/20 budget model. It’s both the easiest to manage and the model that makes the most sense to the broadest number of people. This method recommends that you spend roughly 50 percent of your after-tax take-home income on necessities, 30 percent on things you want, and 20 percent on savings and debt repayment. Of course, if your goal is to pay down debt, you can play with these percentages, but in general, the 50/30/20 method is a good way to build a yearly budget.
How to Set a Monthly Budget
Once you have your yearly budget and goals figured out, it’s time to narrow your focus a bit and break that budget down into monthly chunks.
To do this, take your yearly income and divide it by 12. Then take your annual expenses (including all those infrequent expenses you added into your yearly budget) and divide them by 12. This will give you a good idea of how much you have coming in and how much you have going out on a monthly basis. It will also let you get a better, more specific idea of where your money flows each month.
One word of advice when narrowing your budget to the monthly level: Expenses and income can rise and fall throughout the year. Perhaps you always get a holiday bonus. Maybe you spend a little more in the month of a loved one’s birthday. Just be sure that you take these things into consideration when planning your monthly budget.
It also pays to revisit your monthly budget on a regular basis. It will help you track where you are on your goals, and you can curb any overspending before it becomes a problem. If you keep a close and watchful eye on your budget on the monthly level, you can adjust your monthly budget based on how much you save or overspend.
How to Set a Weekly Budget
Weekly budgets help keep you keenly focused on your incoming and outgoing finances. A weekly budget can help you make budgeting a habit, too.
Working from your monthly budget, break each month into its respective number of weeks. This will help break significant expenses down into smaller, bite-sized chunks and make saving and spending more manageable. If you find you have leftover cash because you didn’t spend as much on gas or groceries in a week, you can roll that over into the next week or decide to save it and get ahead on your goals.
The best way to manage a weekly budget is to check in with it at the beginning and the end of the week. Consider managing it the same way you might check and manage your calendar for the next week. If you make weekly budgeting a part of your daily and weekly habits, it becomes much more manageable in both the long and short term.
Make Budgeting a Way of Life
Budgeting in today’s uncertain economic climate can mean the difference between feeling unstable and feeling secure. If you start slowly and get a handle on your finances on a regular basis, you can ensure happiness, safety, and health for you and your family in the future, no matter what happens in the world. By breaking the budgeting process into chunks and tackling it at the weekly, monthly, and yearly levels, you can get a more comprehensive idea of where your money goes and make better decisions about any future expenses you might incur. If you make budgeting a habit, it can become as easy as planning your weekly meals or managing your calendar.
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