Budgeting

Yearly Budget: How To Make an Annual Plan

If you are struggling with managing your finances, you are probably not using a budget. And you are not alone; recent surveys have found that 40 to 55 percent of Americans don’t use any personal budget to monitor their earnings and spending. A yearly budget will keep track of your income and expenses and allow you to set goals to save money or making big purchases. It is a financial tool that just about everyone should use, regardless of income. We’ll show you how to build a yearly budget and how to maintain that budget each month.

If you don’t think you need a budget, you’re wrong. Read on to get started building a yearly budget today!

Your Annual Budget starts with a Monthly Budget.

Keeping an annual budget is a financial habit that gives your spending the structure it needs. But just because it’s important doesn’t mean that managing your budget is complex. The key to maintaining a yearly budget is to take it month by month.

Figure Out Your Net Income

The first step in building a yearly budget is to find out exactly how much money you make in a year. Knowing what’s coming into your bank account is the best way to monitor what’s going out.

Gather your payroll stubs, bank statements, and other financial documents detailing your income, and calculate the total. If you are self-employed or freelancing, you must calculate the tax yourself using the 15.3% self-employment tax rate.

When you get your total for the month, multiply it by 12. This amount is your annual take-home income.

Identify Your Expenses

After totaling your income, you’ll want to do the same thing for your monthly expenses. There are two types of expenses—fixed expenses and variable expenses.

Fixed Expenses

Fixed expenses are the bills that don’t change; you owe just about the same amount every month. Fixed expenses include loan payments, tuition, mortgages, and rent. Put those in their categories on your budget sheet.

Variable Expenses

Variable expenses change from month to month. The amount you owe is based on your needs from month to month. Variable expenses include groceries, credit cards, and transportation costs (gas, Uber, etc.). List these items on your budget sheet along with your fixed expenses, and estimate how much you think you’ll spend for the month.

Create a Wish list

What is the thing you want the most? A new car? Dream vacation? Whatever it is, create a category for these things in your budget. Be sure to also list any financial goals, like paying off credit card debt, a cash advance loan, or getting a certain amount of money into your savings account. It’s not uncommon for people to think that a yearly budget shouldn’t have non-essential items listed. But, making even small contributions will get you closer to making each item on your wish list a reality.

Create an Emergency Fund

Whether it’s a sudden illness, a critical car repair, or loss of income, life’s unpredictable curveballs can throw a serious wrench in your life. That is why learning how to build an emergency fund is an essential part of building your yearly budget.

An emergency fund is a reserve of money that you set aside to cover unexpected financial responsibilities. Your savings are for meeting your long-term financial goals. But your fund is there for the things we can never plan for.

How Much Money Should You Put In Your Fund?

When it comes to the size of your fund, a general rule of thumb is to build a fund that has enough money to cover 3 to 6 months of your expenses—an amount that varies from person to person. For example, if you have children or other dependents, or an underlying medical condition, you should consider building a larger fund that can cover your needs for up to a year.

Any substantial fund will take a while to build; after all, you have bills and obligations that need to be covered now. Like any part of your budget, it will take some discipline to make your fund grow. Use banking features like automatic transfers to make deposits.

None of your other bank accounts should connect with the account that holds your emergency funds. Emergency funds are insurance to be only used when you experience an emergency or disaster, so it should be a separate account that you don’t touch until you need it.

The 50/30/20 Budget Rule

The standard approach to budget building may not work for you. But, that doesn’t mean that you shouldn’t apply a plan to your finances. If a structured annual budget is overwhelming, the 50-30-20 budget rule is a clear starting point for managing your money.

According to the 50-30-20 budget rule, you should break your income after taxes into three spending categories:

The most significant amount of your net income—50%—goes to essentials and bills you have to pay. These bills include:

  • rent or mortgage payments
  • utilities
  • groceries
  • child support
  • car payments
  • insurance premiums
  • minimum monthly payments on any loans

Then, put 30% towards what you want, like a cable TV package or a new gaming system. They are things that you could ultimately do without, but they add some fun to your life.

The remaining 20% of your income goes to repaying debt or stashing into savings. If you do have debt, pull from this 20% to beef up your monthly minimum payments. But don’t use all of it; set aside some money for savings will build a reserve that will reduce the need for you to take on more debt later.

The 50-30-20 budget rule provides a simple and direct view of your spending. If you discover that you’re spending more in one category, you should consider making cost-cutting adjustments. That could include moving to more affordable home, downsizing your car, or eating out less.

Make Tough Decisions and Adjust

Setting up a yearly budget can not only organize the way we spend, but it can also reveal that our problem may be overspending. If you discover that your monthly income is less than your monthly expenditures, you need to reevaluate the priorities in your budget. Perhaps you can downgrade to a car with a more affordable loan? Are your cable TV and high-speed internet package necessary, or could you get by with just one or the other? Adjusting your budget can force some hard decisions, but covering your basic needs and keeping you from drowning in debt is why you built the budget in the first place. When your budget tells you to cut something, do it.

Conclusion

A yearly budget will do a lot for your financial planning. But, it will only work if you work it! Make time weekly to review your budget and make sure that your spending stays on track. The work you put in will be worth the financial security and freedom.

References:

64% of Americans changed their spending habits during the pandemic—here’s how

The Beauty of Budgeting