Here’s how you can make your budget more advanced than everyone else’s:
First, copy your one-month budget across 12 columns to cover the entire year. We’re creating a yearly budget, not just a monthly one.
### Why One-Month Budgets Don’t Work
One-month budgets often fall short because:
– Expenses can fluctuate significantly each month. If you average them out, you might underestimate your bills and end up unprepared.
– Income can vary. Some months might include additional income from sources like tax returns or bonuses.
– Some months involve larger, irregular purchases such as vacations or holiday shopping.
– They don’t take into account the “three-check” month phenomenon.
### What Is a Three-Check Month?
If you get paid every two weeks, you receive 26 paychecks a year. Dividing this by 12 months means you get two extra paychecks, resulting in two months where you receive three paychecks instead of two. This isn’t captured in a one-month budget but is essential for yearly financial planning. The difference between budgeting for 24 paychecks versus 26 can be significant.
### Connecting Months Together
With a 12-month budget, you need to link each month. Start with January. Above your expenses, write your starting bank account balance. Add the Monthly Net Exchange (total income minus total expenses). This gives you the Ending Balance for the month.
Add a section called “Cash Reserves In/Out” above Monthly Net Exchange:
– If you transfer $1000 from checking to savings, it’s not an “expense” but recorded as “-$1000.”
– If you need $2000 and transfer it from another account, it’s not “income” but recorded as “+$2000.”
For January:
– Starting Balance + Monthly Net Exchange + Cash Reserves In/Out = Ending Balance
Carry over the Ending Balance of January to the Starting Balance for February and apply the same equation. Repeat this through to December.
### The Best Part of a 12-Month Budget
You can easily see your financial status for each month across the year. This comprehensive view helps you anticipate any trouble spots and manage your money effectively. You can also gauge the impact of significant expenses and plan accordingly.
Next, we’ll cover bigger expenses that often get overlooked.
Stay tuned for the next chapter.
