Step 77: Make a Year Budget

We’ve looked in detail at making a monthly budget where you carefully plan your expenses per category per month to ensure that you achieve your goals, both short-term as well as long-term, especially when it comes to savings, pension and investment goals. Without a budget it is easy to overspend and to lose the overview of where your money goes each month.

In addition to making a monthly budget it is wise to also draw up a yearly budget in which you make a yearlong plan for your expenses. We’ve already touched upon this a little when we discussed making a monthly budget, when we looked at the importance of bearing in mind certain yearly expenses that don’t come up every month but might come up just a few times or even just once a year.

A yearly budget doesn’t only ensure that you remember to budget for these expenses though. The added advantage of a yearly budget is that you can make a better and more accurate plan for your expenses by bridging the gap between your long-term financial goals with your day-to-day spending patterns. Of course, having a monthly budget already gives you the opportunity to plan expenses far better than if you just spend without being fully aware of your monthly total spending pattern. But it won’t give you as much insight into whether you are on your way to achieving your long-term financial goals or whether you are still quite a long way off. By making a budget for a full year you get a far better overview of this.

Of course your monthly and yearly budget are closely related as often times your monthly budget might be close to being 1/12^th of your yearly budget. Yet most likely this isn’t always the case, as you might be able to set aside more or less money in certain months. In some of the winter months during the holiday season many people experience and increase in their expenses due to such things as presents, food and travel expenses as well as heating costs. This might change their budget significantly and might mean they are not able to set aside the same amount of money towards their savings goals as in other months.

A yearly budget is the in-between step that will help you translate your long-term financial goals into actionable steps. Let’s imagine that you have a goal to save $30.000 in the next 4 years. Of course you can work out that this is $625 per month that you need to set aside (ignoring inflation and interest for a moment), but the reality is you might not always achieve that goal. There might be months when your expenses increase, your income decreases or you experience a financial set back that might need you to rely on your emergency fund for example. Instead of continuing to save, you should look at replenishing that emergency fund back to its original value as soon as possible. In all those cases you just simply might not be able to stash away $625 per month.

Instead of giving up and accepting defeat, a yearly budget will help you to readjust your monthly budgets for the months to come and will push you to still aim to set aside $7500 a year even if it wasn’t evenly distributed over the 12 months. If you only had a monthly budget, you wouldn’t be able to do this. All you would say at the end of the month is that you hadn’t achieved your goal of $625 that month. Chances are there might be another month when you are unable to achieve it and who knows a third month.. If you don’t correct it and review the yearly goal of $7500 you won’t ever get the $30.000 together in 4 year’s time. And whereas a monthly budget will at least motivate you to try for the $625 again the next month, a yearly budget takes this a step further and pushes you to save extra what you didn’t save enough in the previous month: If you only got to saving $500, it will tell you to put away $750 in the next month. This will keep you on track for the $7,500 for this year and the $30,000 in 4 years.

Step 77 – Make a Year Budget – in detail:

• Pull out your monthly budget and have a look at all the various categories.
• Think about any categories that you might be missing that maybe don’t come up monthly but only a few times a year. These could include:
  • Fixed and variable expenses:
    • taxes
    • bank or account charges
  • Discretionary expenses:
    • Christmas presents
    • Birthday presents
    • Events to attend – weddings, parties etc.
• Determine your yearly income that you have available to assign to your budget.
• Now think about each expense category in turn and decide your targets for each one. Start with your savings expenses, including any debt payments. How much would you like to pay off during the next year? Or how much would you like to save or invest this year?
• Decide on the monthly amount you need to budget for the remaining categories and each expense. Set yourself targets for each category based on your knowledge of your expenses up to now. For example if your total electricity bill for the past 12 months was $900, set yourself the goal of keeping it on $850 for the year, knowing that in certain months the monthly bill will be higher due to heating or air conditioning costs for example but that in other months you might be able to compensate for this more.
• At the end of each month, during your monthly finance review, analyze how well you did with your monthly budget and expenses, and then link it back to your yearly budget. Review how much you’ve deviated from the plan and how to adjust for this in the next few months.
• Update your upcoming monthly budgets accordingly and always keep an eye on your long-term goals.

Having a yearly budget and using it regularly will ensure that you stay on track for your long-term financial goals whilst simultaneously translating those goals into achievable monthly targets. It also helps you not to feel de-motivated if you don’t hit your targets in specific months as it quickly helps you to re-evaluate and adapt to a new plan. Life can never be completely planned and predicted,so you’ll always need to find ways to navigate around setbacks and obstacles to get back on track quickly.

Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.