What You Need Instead Of A Monthly Budget

There are two methods of budgeting: monthly budgeting and annual budgeting. Although both ways are possible, I favor annual budgeting, since it gives you a more accurate picture of your expenses. Here’s why:

Look at the big picture

When dealing with budgeting, it is important to have a picture of your general, overall expense situation. While monthly budgeting forces you to focus on short-term expenses, such as your monthly electricity bill, annual budgeting, on the other hand, forces you to focus on the overall picture of your cash flow.

The fear of a using a monthly budget is that it can lead to “tunnel vision” by looking at your expenses very narrowly. By focusing only on the current month, it’s easy to forget to include expenses that only occur once or twice during the year. People that set monthly budgets often exclude expenses that arise once or twice a year, such as a homeowner’s insurance policy, car insurance, yearly dental checkups, and more. Even though these annual or bi-annual expenses can be significant, they can easily be left out of a monthly budget where most of the focus is on recurring monthly bills. Therefore, if you have a long-term budget, these expenses won’t be forgotten.

Just like in chess, where it is important for the player to focus on the whole board, and see the overall direction in which he is heading rather than just focus on a certain square, it is important for a financial player to budget over the long term and see the overall picture of his expenses, and the long-term ramifications of spending. Once a chess player knows where all his pieces are placed, and grasps the overall diagram of the chessboard, he could start winning battles for specific squares. Similarly, once your annual budget is set, you can work backwards and break it down into smaller segments, which is your monthly budget.

Don’t be scared of the big picture

Many people are not confident they will estimate their annual budget correctly since it is a daunting thought to set out all of your annual expenses at the beginning of the year.

Print Friendly, PDF & Email

Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

Share This Post On

Submit a Comment

Your email address will not be published. Required fields are marked *