Ah yes, the dreaded budget! That thing that so many people feel is a chore, or a straightjacket, that tool that deprives you and keeps you from having any fun. However, what if I could show you a better budget that gives you control of your money so that you can meet financial goals, prepare for the holidays, and spend what you want?
How can you achieve your financial resolutions for 2019? An annual zero budget allows you to see the whole year laid out before you. You get to choose exactly where each dollar will go and find relief in knowing what will happen to your money before it happens. Here’s are 5 things to include in your annual zero budget:
1. Income
List all sources of income for each month of the whole year. This is rather easy if you earn a regular salary. If you have an irregular income, I recommend budgeting the least amount that you earn in a regular month (I’ll let you know how to handle anything extra). Make sure to include other kinds of income like child support, side hustles, etc.
2. Bills
The next section of your annual budget should be for your bills, minimum debt payments, and subscriptions. Basically, everything that you need to pay on a regular basis. I personally like to organize this from largest payment, like Rent/Mortgage down to the smallest, like a Hulu subscription or cat litter delivery subscription. For utilities, you can usually look up your payments for the last year by contacting the utility company. This is helpful as our electric and gas usage varies depending on the weather, and properly predicting the bills for the current year is important. As for any debt that you have, you must include all minimum payments in this category, and we will address any extra payments in a later section. Finally, if you like to save a bit of money and pay for your insurance annually or every 6 months, then you can plan for that amount by taking the total payment and dividing it by 6 or 12 respectively, and record that amount for each month.
3. Cash Spending
Now for the more enjoyable section: spending! In this section, you need to figure out a budget for food and household items, and a personal spending allotment for yourself and each person in your household. The food line item can be very tricky if this is your first budget. Food budgets, for grocery items that you consume at home, can range from $100/month per person up to $300/month per person. Families with larger households or
Now for personal spending. We all need a little bit of enjoyment. This area will include clothing, meals out, and entertainment. If you are prone to save and scrape each penny this can be difficult, but it is important to give yourself a small gift each month. If, on the other hand, you like to spend money and buy things on a whim, this section can also be difficult. Remember to give yourself a little something in order to quench the spending cravings but keep yourself on track for the year.
Important Tip: Taking out cash for your monthly spending will help you keep tabs on your spending without needing to keep receipts – you have the cash, or you don’t. If this is your first time trying this, take out ¼ of your cash for each week, that way you don’t accidently spend all your cash at the beginning of the month.
4. Savings
Next up, pay yourself! Yep, setting aside money for your future self is one of the best investments you can make. This is the best way to ensure that you are not living paycheck to paycheck. This is the most important category that brings all the others together. This is where you can make progress toward reaching your goals!
As we discussed before, if you do not have a consistent income, any extra income should only go toward items in this section. That way you make sure that you are not living beyond your means.
Saving should first go toward building an emergency fund – money that sits in a simple savings account and is reserved for the unexpected car repair, medical bill, or job loss. Most people need to set aside 3-6 months of expenses in order to have a fully established emergency fund (but at the very least start with $1000).
Once you have contributed to your emergency fund, it’s time to tackle your financial goals! Everyone’s goals are different: saving for a car or house, saving for your child’s college, and paying off debt. I recommend focusing on paying off debt before saving for purchases. Debts that we want to get rid of include credit cards, student loans, car loans and anything else that is not your home mortgage. Paying interest on these debts makes it hard to feel successful or to make progress on your goals. Since we already paid the minimum on all your debts in the Bills category above, any remaining money should go toward first paying off the debt with the highest interest rate. Once that highest interest rate debt is paid, you’ll have even more money to put toward paying off the next one.
What about saving for holidays and vacations? Every year there are some irregular things that we all like to spend money on: birthdays, holidays, summer camps for kids, or a charitable program that you want to participate in. So, I recommend adding up these costs in a holiday/gifts category and planning for them in advance. Next, if you usually take a vacation(s) or trips to visit family every year we want to be sure to plan for these in advance by creating a vacation line item. If you’ve never had a holiday reserve, you are in for a big treat next year, when the money you set aside for gift-giving is ready and waiting to be shared. Even better, no killer credit card charges in January!
Once the debts are all gone, you will have freed up more money to put toward saving for large purchases and other goals like buying a house, your child’s college savings, and retirement. Allocate all
5. Get to Zero!
Total = Zero! To be sure that you have your budget maximized, your total after adding all income minus bills, spending, and savings should equal $0. If your total is negative, then you have planned to spend more than you make and will need to reevaluate your budget to see where you can make cuts to get to $0. If your total is positive, then you will get to assign those dollars to the saving category. If you don’t assign each of your hard-earned dollars, they tend to disappear. This way you know exactly where every dollar is going, and you are in control!
Budgets may seem intimidating, but they can be an invaluable tool to get your money to behave. If this is the first time you’ve ever tried to budget, know that it takes a few months to get it just right. You may find that you underestimated your food or forgot about your annual car tags/registration. Don’t feel bad, just adjust the remaining months and get back to $0. The more you practice, the better you will get. Best of all you will see progress in just a few months.
Now is the time to make your financial plan for 2019 and reach your goals. If you need help, or would like to use my Annual Budget excel template, please contact me at mybekkedahl@gmail.com.