The Complete Guide To Planning A Yearly Budget - The Importance Of Yearly Budgets
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  1. The Complete Guide To Planning A Yearly Budget - Introduction
  2. The Complete Guide To Planning A Yearly Budget - The Importance Of Yearly Budgets
  3. The Complete Guide To Planning A Yearly Budget - Making Budget Projections
  4. The Complete Guide To Planning A Yearly Budget - Needs Vs. Wants
  5. The Complete Guide To Planning A Yearly Budget - Creating A Yearly Budget
  6. The Complete Guide To Planning A Yearly Budget - Investing The Money You Save By Proper Budgeting
  7. The Complete Guide To Planning A Yearly Budget - Conclusion
The Complete Guide To Planning A Yearly Budget - The Importance Of Yearly Budgets

The Complete Guide To Planning A Yearly Budget - The Importance Of Yearly Budgets

A yearly budget is a summary of all the money you expect to earn and spend during a 12-month period. Because budgeting involves number crunching and making projections, many view the process as overwhelming, and procrastinate or altogether avoid sitting down to create a budget. Rather than viewing it as a chore, consider your budget a tool to help you plan, set and reach your financial goals - whether you want to save for a down payment on a house, build a nest egg for retirement, pay down debt or go on your dream vacation. A budget is an important financial tool because it can help you:

Plan for Expenses
A good budget can help you plan for various expenses. Generally, short-term expenses happen in the next month; mid-term expenses occur in between one month and a year; and long-term expenses are those that take place further out than a year. Examples of short-term expenses included your monthly bills and normal purchases (such as utilities, groceries and subscriptions). A mid-term expense might be a vacation that you plan to take six months from now. Long-term expenses include "big" expenses that require prior planning - such as a down payment on a house, college for the kids and saving money for retirement.

A budget allows you to plan for now and the future. You can compare how much you are earning with how much you are spending, and adjust accordingly to meet your financial obligations. Part of this requires examining needs versus wants - expenses that you can't avoid, and spending that is discretionary.

Cut Costs
When you create a budget, you are making projections about how much you will earn and spend in a year. It is all too easy to underestimate the amount of money you are spending on, say, food or clothes or your smartphone. If you have budgeted $400 per month for food, for example, you may be surprised to learn that you have been spending way over that figure because of your daily coffee on the way to work, a soda from the vending machine while at work and a sports drink at the gym after work. While it is important to stay hydrated, it is vital to understand that these habits can have a huge effect on your bottom line. For example, these three drinks might add up to:

Drink
Daily
Weekly
Monthly (22 days)
Yearly (260 days)
Coffee (with tip)
$3.00
$15.00
$66.00
$780.00
Soda
$2.00
$10.00
$44.00
$520.00
Sports Drink
$2.50
$12.50
$55.00
$650.00
Totals
$7.50
$37.50
$165.00
$1950.00
Your budget will be able to show that the three drinks you purchase each day are eating up 41% of your monthly food budget. This doesn't mean you shouldn't enjoy your daily beverages, but you can save money by planning ahead, brewing your coffee at home and bringing sodas and sports drinks from home that you purchased at a grocery store:

Drink
Daily
Weekly
Monthly (22 days)
Yearly (260 days)
Coffee at home
$0.42
$2.10
$9.24
$109.20
Soda (bulk store)
$.35
$1.75
$7.70
$91.00
Sports Drink (bulk store)
$1.00
$5.00
$22.00
$260.00
Totals
$1.77
$8.85
$38.94
$460.20

As you can see, if you plan ahead these drinks will now account for only 9% of your monthly food budget instead of 41%. You could decide to save further by swapping out your daily soda and/or sports drink for tap water (bring your refillable water bottle from home). The point is, without a budget you may have no idea how much money you are spending on certain things, and as a result, you will have no defense against those expenses. A budget can help you find and eliminate excessive spending.

Save for Future Goals
It is impossible to reach a financial goal if 1) you have not identified the goal; and 2) you have not made a plan to reach that goal. The "one day I'm going to pay off that student loan" talk isn't going to get you any closer to satisfying that debt. Rather than making a wish, set a goal: "I am going to pay off my student loan by the end of 2015." Once you have a goal, you can outline the steps necessary to reach that goal: "I will double my student loan payment every month, allowing me to pay it off by the end of 2015." (All education loans allow for penalty-free prepayment, meaning you can make extra payments to reduce the balance without paying a penalty.

By examining your budget, you can "find" the money that you need in order to double the loan payment. For instance, we saw in the above drink example that someone could save money considerably by planning ahead with daily drink purchases. The $126.06 in drink savings each month could go a long way towards paying off the student loan debt, or towards saving for any other future goal. If you don't plan, it's not going to magically happen: you have to look to where you want to go, not where you are going.

Spend Wisely
A good budget will help you determine if your income will be enough to cover your anticipated spending. If you are spending more than you earn, you will either have to make more or spend less in order to gain control of your financial situation (i.e. money isn't going to materialize out of thin air). If you have the good fortune to be in a situation where you earn more than you spend, you will have money left over. You will know ahead of time if you will have a surplus, and can make deliberate and intelligent decisions about how to spend, save or invest that money. If you did not have a budget and had no way of knowing that there would be a surplus, there is a good chance that the extra money would simply get absorbed into mindless, everyday purchases.

For example, assume a yearly budget shows that income will exceed expenses by $6000 for this coming year. The savvy budget-user could use this "extra" $500 each month to pay down high-interest debt, save for a down payment on a house, contribute to a retirement savings plan or start an emergency cash fund.

Plan for Emergencies
An emergency cash fund is money set aside for emergency purposes. The fund is intended to help you pay for unexpected expenses, such as a trip to the emergency room or costly automobile repairs. The fund is also designed to help you pay for your regular expenses when your income is interrupted, such as if you are laid off at work or if an illness or injury prevents you from working.

How can a budget help? First, if you have a surplus in your budget, you know you can set aside a certain amount of money each month until your fund reaches an adequate size - say, enough to cover three months' worth of expenses. Secondly, if your emergency fund has already been used and you haven't had time to rebuild it, you will be able to look at your budget and shift spending to cover the unexpected expense. For example, you may have to limit your dining out for a couple months in order to pay a doctor's bill. If you have depleted your emergency fund, you can look at your budget to determine a course of action to rebuild the fund for the next emergency.

Prioritize your Spending and Saving
A goal can be an excellent motivator. Say you really want to take a vacation next summer, and you will need $5,000 to do so. Once you have budgeted for your expenses that are unavoidable (your needs; more on that later), you can determine how to divvy up the rest for discretionary spending and saving for spending goals. Unless you have a big surplus, you will have to limit some discretionary spending in order to be able to save for your vacation goal.

With the vacation as motivation, you can prioritize your discretionary spending. Analyze the expenses in each category - such as entertainment and clothing - and determine what is more important to you: the newest iPhone or the summer vacation.

The goal can be anything - saving for retirement, buying a new car or learning how to surf in Central America. What's important to remember is that you can decide in advance, with your budget, how your discretionary money will be spent, saved or invested. Without a budget, it's easy to burn through all of your money on less important expenses without ever reaching your goals.

The Complete Guide To Planning A Yearly Budget - Making Budget Projections

  1. The Complete Guide To Planning A Yearly Budget - Introduction
  2. The Complete Guide To Planning A Yearly Budget - The Importance Of Yearly Budgets
  3. The Complete Guide To Planning A Yearly Budget - Making Budget Projections
  4. The Complete Guide To Planning A Yearly Budget - Needs Vs. Wants
  5. The Complete Guide To Planning A Yearly Budget - Creating A Yearly Budget
  6. The Complete Guide To Planning A Yearly Budget - Investing The Money You Save By Proper Budgeting
  7. The Complete Guide To Planning A Yearly Budget - Conclusion
The Complete Guide To Planning A Yearly Budget - The Importance Of Yearly Budgets
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