Budgeting Basics - Step 8 - Big Picture

Why should you base your budget on your annual pay rather than budgeting around each individual paycheck or month?

Many expenses are weekly or monthly, and it seems reasonable to manage those based on your individual paychecks or each month. Then for the expenses that are infrequent or not scheduled, you pay out of the surplus of each paycheck or each month's pay.

When you do that, it's hard to plan for expenses that come less often but are fully foreseeable. Also, when you budget based on a short period of time, it's hard to save for those expenses that can be expected but can't be known in advance.

Examples:
Vehicle registration comes only once per year, but you know exactly when to expect it and how much it will cost. This is a fully foreseeable expense that isn't monthly.

Christmas and birthday gifts and celebrations each come once per year at times that are known in advance. You get to choose how much you spend on them, but you can plan that in advance based on your annual income and expenses.

Clothing purchases have to be made, especially with growing children to buy for, but exactly when they have to be made or how much they will cost isn't definite. (You can of course decide how much to spend and when to buy, but it isn't necessarily scheduled.)

Most families can expect to have some medical or dental expenses during each year. You can't necessarily know in advance when they will occur or how much they will be, but you can guess at an amount that will cover some of them.

Car repairs aren't usually foreseeable, but cars do need them regularly, especially repairs such as new tires or belts and hoses. It's reasonable to have a sum of money on hand to help pay for those expenses even though you can't know in advance exactly when they will occur or how much they will cost.

==================================

When you budget based on the entire year's pay and the entire year's expenses, you can make an attempt to include those less frequent or unscheduled expenses. That allows you to be prepared for them ahead of time rather than scrambling at the last minute.

The next step will explain how the "envelope system" can help you use the annual budgeting method to your best advantage.

Back to the Beginning