A common mistake I see in people’s budgets are bi-weekly costs multiplied by two, and weekly costs multiplied by four, to arrive at a “monthly” amount. If you are developing a budget for the entire year, this will leave you short a few payments. A better method is to annualize the cost, and then spread it out over 12 months to arrive at a “monthly amount”. This is an easy adjustment to make, and one which will not leave you shortchanged at the end of the year.*
For example, let’s say that you spend $100 per week on cleaning services for your home or office. The “wrong” method is to take this number and multiply it by 4 to get $400 per month, then multiply it by 12 to get $4,800 per year. This leaves you with a budget of 48 weeks – four fewer than the 52 weeks in a year. A better method is to multiply your weekly amount by the number of weeks in a year (52), and then divide by the number of months (12).
X $100 x 4 weeks x 12 months = $4,800 per year or $400 per month
√ $100 x 52 weeks / 12 months = $5,200 per year or $433 per month ($400/yr difference)
Because there are 52 weeks in a year, you will always have 4 months with 5 short weeks, resulting in 5 pay periods for that month. For 3/4 of the months under the annualized method, you will under-spend your budget by $33. For the remaining 1/4 of the months, you will overspend it by $100, balancing everything out.
For services billed bi-weekly, multiply the cost by 26 and divide by 12. For example:
X $100 x 2 weeks x 12 months = $2,400 per year or $200 per month
√ $100 x 26 weeks / 12 months = $2,600 per year or $217 per month ($200/yr difference)
For services billed every four weeks, multiply the cost by 13 and divide by 12. For example:
X $100 x 1 weeks x 12 months = $1,200 per year or $100 per month
√ $100 x 13 weeks / 12 months = $1,300 per year or $108 per month ($100/yr difference)
If you have trouble remembering how many periods there are in a year, just remember there are 52 weeks in a year. Divide that by two to get the number of bi-weekly periods (26), or divide 52 by four to get the number of four-week periods (13).
|# Periods Per Year||Conversion-to-Monthly Formula|
|Weekly||52||[Weekly Amount] x 52 / 12|
|Bi-Weekly||26||[Bi-weekly Amount] x 26 / 12|
|Every Four Weeks||13||[Four-Week Amount] x 13 / 12|
I used an example of janitorial services at a fixed rate of $100/week, but the same thing could happen anytime you bill in one unit and pay in another – for example, you bill your customers a service contract at $1,000/mo, but you budget your technicians by the week. If you budget them at $250/week, you’re going to be short at the end of the year. If you’ve set up a budget and you feel like you’re perpetually missing your targets, make sure you aren’t making this common mistake.
A few notes:
- Although paychecks follow the same rule (you get paid on a weekly or bi-weekly basis, not monthly), I like to intentionally use the “wrong” method for calculating my monthly income because it means I will have EXTRA money at the end of the year. People more frequently overspend than under-spend budgets, so this is an easy way to give yourself a little extra wiggle room.
- When you divide 365 days per year by 7 days per week, you get ~52.14285, or 52 weeks and one day in a non-leap year. For most purposes, the 52 rule for weekly, 26 for bi-weekly, or 13 for every four weeks work fine, but if you’re budgeting for something where the exact number of days matter, like payroll, make sure you get your numbers down to the day. I’ve seen even large institutions make this mistake, so double-check your numbers!