Friday, February 15, 2013

Why A Monthly Budget May Be A Terrible Idea For You

If you google the phrase "budget template", you will be bombarded with a plethora of free or not-so-free templates that you could download and use.  Notice anything in common with all of these templates?  Go ahead, I'll wait while you go google them...   All these budget templates are on a monthly basis.  Chances are, if you are like most money earning individuals out there, a monthly budget is a terrible idea for you.

Hear ye, hear ye, the only people who should keep a monthly budget are those that get paid monthly.  

For those of you who are paid once a month, whew, best of luck to you.  You really do need to keep a budget because you have to go a loooong time between paychecks. Never fear, the upcoming budget nuts and bolts post will suit you as well. As for the rest of us, we all get paid every other week or maybe every week.   If you are in the bi-weekly or weekly paycheck club, your bills and expenses may follow a monthly cycle, but your income does not.  Trent and I tried the monthly budget approach and we ended up really bogged down and frustrated.  We realized we were trying to budget based on an arbitrary time frame that did not match our actual cash flow.  So we decided to break it down.

We now keep a budget based on two week pay periods.   My pay day is every other Tuesday.  Trent's deposit from Mission Waco is every other Wednesday, the day after mine hits.  His deposit from church hits every other Friday, within the same week as the other two.  So, in a four day span, we receive all the income we are going to get for that two week period.  We begin each budget period on the Tuesday of my deposit and go from there, knowing the rest of the income will be there shortly.  We start with our total income for the pay period, which is basically always the same, then list the bills and expenses for that two week span only.  If the pay period at hand ran from the 1st of the month through the 13th, we would only include any bills due on those dates.   If something is due on the 14th or thereafter, that is included in the next column which represents the next pay period.

Every single budget period is a bit different, because we are going by the dates of our paychecks.  Since each month (besides February) is a few days longer than four weeks (two pay periods), things end up shifting a bit.  Generally they switch off.  For example, the 1st of the month bills will be in one budget period, then not the next, then back in the third.  If one period ends up light on bills due, that means that the next period will be top heavy and there may actually be more bills due than there is income.  Never fear, our budget template (that I will go over in detail in the next post) accounts for the times when a carryover of money is needed from one period to the next.

Is everyone tracking with me?  Don't worry, this will be shown very clearly in the upcoming Budget Basics post where we'll get nitty gritty about rows, columns, categories, color coding and formulas.

For now, here's a summary of the reasons I believe it is beneficial to budget based on your pay periods instead of monthly:

1. It follows actual cash flow of income, which is not monthly.
2. It breaks it down to shorter, more manageable budget periods.  If you totally screw up in one, you are not far from the next restart date.
3. It allows for you to better account for the items that you spend money on more often than once a month, like groceries and gas.  Bills may be monthly, life expenses generally aren't.
4. It allows you to see at a glance when you might need to borrow from one income heavy pay period and stash some for the next bill heavy pay period.
5. It has revolutionized the way we handle our money and I hope it can do the same for you.

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