Ever wonder where your money goes? You’re not alone. A passive approach to personal finances can leave many individuals, couples and families in an endless cycle of earn it, spend it, wonder-where-it-went. Fortunately, there is a tool that can track your income and expenses – a personal budget. This tool allows you to proactively gain control of your finances. A budget, sometimes called a spending plan, is an outline of anticipated income and expenses that can be used to track actual cash flow and set spending goals.
While many people could tell you exactly how much money they expect to make this year, very few could extend the same accuracy with spending. Without a budget, it can be difficult to determine where your money is going. Once you know what you’re spending your money on, it becomes easier to figure out ways to reduce or eliminate certain expenses and save more money.
Typically, budgets are created on a monthly or yearly basis. While a monthly budget is a useful financial tool, a yearly budget can provide a “big picture” view of your finances, taking into account the irregular expenses that may inadvertently be left out of a monthly budget. An annual budget requires that you estimate all of your expenses, including those that occur only once or twice a year – such as homeowners’ insurance, car insurance, a yearly dental checkup and even holiday expenses. These annual or bi-annual expenses can be significant, but can be easily left out of a monthly budget where it’s easy to focus on recurring monthly bills.
A 2008 study published in the Journal of Consumer Research found that people who make annual budgets instead of monthly budgets are better at predicting their spending. The authors believe the explanation lies in an individual’s approach to creating a budget: people are more likely to work harder at an annual budget (than a monthly budget) because they are less confident in their abilities to make accurate projections. Interestingly, the same study determined that people who were told ahead of time that budgeting is a difficult task were more accurate with their predictions than those who were told that budgeting is easy.
Budgeting may not be easy, but neither is running out of money before all of your bills are paid. With a bit of time and effort, you can create a yearly budget to take charge of your financial situation. This guide will explain why it is important to use a yearly budget, how to create your own and how you can use one to make better financial decisions.