You’ll specifically use this article in Step 3 of The 9 Steps to Financial Freedom. However, it’s beneficial to review it in all steps.
If you created a budget in the past and it didn’t stick, I bet you jumped right into a monthly one.
Did you become frustrated after you saw that you’d only be able to pay off an extra $200 of debt per month?
Did you forget about the 6 month car insurance premium and it derailed your plan for the month?
These are some of the reasons why you should create an annual budget first.
It’s not only important to look at your current income and expenses, but also your projected income and expenses in the future.
Here’s how it will help.
Breaking down your income and expenses on a monthly basis is a key step on your path to financial freedom. Especially if you’re eliminating debt.
However, it can be a little depressing to see that you’ll only have $200 left at the end of the month to save or pay extra on debt.
You might think to yourself, “What’s the point?”
This is where the annual budget can help.
It will give you a greater overview of your plan and can show you larger, more motivational numbers.
Think about my example above.
Yeah, $200 per month isn’t much, but what if you think about it over a 12 month time frame?
That $200 per month becomes at least $2,400 over 12 months!
Did that suddenly became more motivating?
Even though I’m technically saying the same thing, it sounds completely different!
You see, we compartmentalize numbers differently in our mind.
If I told you that you’d be able to pay off $200 of your debt per month, you wouldn’t be that excited. It’s a small number.
However, if I told you that you’d be able to pay of $2,400 over the next 12 months, suddenly you’d perk up.
Again, I’m saying the same exact thing.
Use your annual budget to see the bigger picture.
Plan For Periodic Expenses
What was your most recent financial setback?
Let me guess. You were finally starting to save money and/or pay off debt, but then an “unexpected” expense occurred.
It caused you to dip into your emergency fund or use your credit card to get back on track.
Was it your 6 month car insurance premium?
Was it gifts during the holiday season?
Whatever it was, I bet it caused you great frustration.
The annual budget can help eliminate the majority of that frustration.
You see, most of the expenses we classify as unexpected, are actually expected.
Think about it.
You know the car insurance premium will need paid. You know how much you usually spend on gifts each year.
The annual budget can help you plan ahead for these expenses and begin saving for them several months ahead of time if needed.
For example, if your car insurance premium is $600 and it’s due 6 months from now, it’s probably the farthest thing from your mind.
However, chances are good that you won’t have enough income in that month to pay the full $600 premium on top of your other expenses.
You may need to start saving for it today.
If you started putting away $100 per month for the expense, you’ll have the full amount set aside when you need it.
Having the money ready will break the vicious “up and down” cycles of your emergency fund and credit card balances.
Does using this type of system mean you’ll have less to set aside for savings or debt repayment?
But think about it this way: Would you rather pay a little less on your debt or continue on the crazy roller coaster ride that is your finances?
Be OK with paying down a little less.
Your Annual Budget
OK. It’s time to create your annual budget.
Here’s what I want you to do:
1. Grab a copy of the annual budget spreadsheet.
(It’s an Excel file, but you can also open it in Google Drive for free. Watch this video if you don’t have Excel.)
2. Start creating your annual budget by entering in all of your net income. Don’t forget to include other types of income such as child support, tax refunds, etc. If you get paid bi-weekly, be sure to find out which months you’ll receive three paychecks instead of the typical two. That’s just more money to help plan your expenses!
3. Enter in all of your fixed expenses such as your mortgage/rent, utilities, minimum credit card payments, etc.
4. Enter in your variable expenses such as food, entertainment, personal items, fun money, etc. These should just be estimates as your monthly budget will be used for more specific numbers.
5. Sit down and think about all of your periodic expenses. Place them in the month they’re due. You may need to grab copies of the last 12 months of your statements to pinpoint when you paid things in the past. You also want to grab your financial goals to see what needs to be saved for.
6. Check the end results to see if you’re overspending in any month. If you are, you need to go back and reduce expenses or start saving for some of the less frequent expenses.
7. Use your annual budget every time you create your monthly budget. Be sure to set aside funds for the periodic expenses you planned for!
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Are you able to see a more clear picture of your income and expenses?
Share in the comments!