Not sure why your budgeting hasn’t been working so far, despite every effort to make your monthly budgets stick? Perhaps a yearly budget is what you need. In this post, we’ll cover what a yearly budget is, why it’s important to use one, and how to create one in order to achieve your personal finance goals.
Why You Need a Yearly Budget Quick Navigation
If you’ve been budgeting for a while, and can’t seem to make it work, a yearly budget might be exactly what you need in order to stay motivated on your budgeting journey.
In October 2019, after reviewing the final numbers of my first year of budgeting, I had mixed feelings. I had succeeded in budgeting for a whole year, which was pretty exciting! Plus I had put $20k on debt while also saving thousands of dollars in my retirement as well as my cash savings, and I also had several months where I stayed “on budget”.
But when I looked at the yearly totals?
I had totally blown my goals. By a lot. You can read about that experience in “One Year of Budgeting Review!” for all the details, but basically I went over budget by hundreds of dollars in five categories. In fact, I went over budget by an average of $507 PER MONTH.
$507! That’s insane! That’s $6k! And it doesn’t count the $9.5k I spent on travel which I didn’t even budget for originally– WHICH MEANS I overspent by $15k in my first year of budgeting.
GAH!
How did I do that even after creating what I thought was a pretty great bi-weekly budget??
Simple– I didn’t have something to keep track of the big picture. My bi-weekly budgets were operating in a silo and I had no reference to how I was doing with my yearly goals.
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Enter: The Yearly Budget
This is when I decided it was time for a yearly budget. How else would I keep track of my goals and adjust my budget numbers accordingly? The company I worked for had an annual budget, so maybe this would help me stay aligned with my goals and look at the bigger picture of my spending?
So I did it, and so far? It’s made all the difference. Not only am I spending my money in a way that is more aligned with my values, but I’m managing to spend the same amount of money I spent last year even while my essential expenses have almost doubled since I moved into my own, roommate-free apartment and I make a crap-ton more money than I did last year.
That’s a BFD. It means I’m not allowing lifestyle creep to impact my yearly spending AND I’m keeping my money working for me by aligning my spending with what’s truly important to me (Hey, there living alone and financial independence).
Why You Need a Yearly Budget
Before we dive into HOW to create and use a yearly budget, let’s cover why it’s important to have an annual budget.
1. Motivation
Remember why you started budgeting in the first place?
Did you picture that ideal life of financial independence and not worrying about losing your job or paying for the bills?
Mmm. Delicious. If you haven’t already figured out your why, I HIGHLY recommend you do this so you can go back to your why when you want to stop.
Your yearly budget is the map to get you to that why and the bi-weekly or monthly budgets you use are the steps you need to take on that map. The yearly budget will show you all your monies, and you’ll be able to see, just by looking at it, how your PLAN will allow you to put your resources in the places you value most, whether that’s travel, debt freedom or saving for the Rolls Royce.
This plan aka your yearly budget will keep you motivated because as long as you stick to that plan? You’re heading in the direction of your ideal life. That’s pretty friggin’ cool.
2. Helps you stay on track
One of the things I realized when budgeting without a yearly budget was that it’s really hard to stay on track with my goals without the bigger picture in mind.
Going back to the map analogy, it’s like I had a list of all the steps to take without being able to see I was going.
Not all that helpful, although better than nothing.
The reason a yearly budget helps me stay on track is because when I overspend in a category in one budgeting period, I then go into my yearly budget and see how I need to adjust my spending in those categories for the next budgeting periods.
For example, say I have a goal to spend $1,200 on entertainment for the year, which means in order to achieve that, I can only spend $100 a month on entertainment.
If one month I blow the budget and spend $200 on entertainment, I’d then need to look at the remaining months to decide how much I can spend on entertainment each month in order to achieve my goal of spending only $1,200 on entertainment for the year.
Say I spent that $200 in January, for the next eleven months of the year I only have $1,000 left to spend on entertainment which means I’d need to only spend $90 a month on entertainment ($1,000/11 months).
See how that works?
If we aren’t adjusting our monthly spending goals, then we fall into the trap of always overspending and never rebalancing our budget. Without that rebalancing part, it gets pretty hard to reach the goals we set for ourselves.
3. Factors in periodic expenses
Remember that $9k I spent on travel without ever having a budget for travel?
I never budgeted for travel in my bi-weekly budgets because in my head– I didn’t travel every month so why would I include that in my budget every month?
A yearly budget helps put those quarterly or once-a-year expenses into my full money plan by adding an extra category that will keep track of those periodic expenses.
Taxes, insurance, car repairs or oil changes, vacation, Christmas spending– these all can be budgeted and accounted for in my yearly budget even if I don’t have them as monthly expenses. Adding them to the yearly budget ensures that I’ve already planned for these expenses, so when they come up during the year, they won’t completely derail my budget. Instead, I’ve already accounted for them in my yearly totals, so I don’t have to worry about spending the money.
Bonus: Great Tool For Saving for Those Periodic Expenses Too
This is a great way to also budget for these items as monthly saving expenses if I need to save for them. Say I know in January that by December I need $500 for Christmas. If I divided that number by the total number of budgeting periods (26 for bi-weekly and 12 for monthly), I’ll have the total of what I need to save each month in order to have that money by December ($41/month or $19/bi-weekly).
Ultimately, a yearly budget is an awesome way to stay motivated, on track for your goals and factor in your periodic expenses.
Convinced?
Great. Let’s move on to HOW we make a yearly budget.
How to Create a Yearly Budget
1. Make sure you have a standard budget first.
If you don’t already have a bi-weekly budget, check out “How to Create a Budget” and “How to Create a Values-Based Budget”. Your bi-weekly or monthly budget is going to be the basis for your yearly budget. Here’s the free template I use for all my budgets.
2. Create a new budget template by copying your current bi-weekly or monthly budget.
3. Adjust the total budgeted spend in your existing categories.
Have you budgeted $100 a month on entertainment? Multiply that by the number of budgeting periods you have (bi-weekly or monthly) and you get your total for the year– in this case $1,200.
Think about what you’re missing in your existing categories a well. You budgeted $100 a month for transportation, but do you need to add additional funds to cover car repairs, oil changes, license fees, registration? Take a look at each of your categories and see what might be missing from those yearly numbers beyond your standard monthly expenses.
4. Add any categories that may be missing to your summary page.
What will you need to spend money on throughout the year that you haven’t accounted for in your current budgets? Travel? Car repairs? Property taxes? Create those categories accordingly. Below you’ll see all my categories for my yearly budget. Note– if you read through my spending reports, you know that I don’t have every single one of these categories every month. I pick and choose based on what my spending needs are and what my calendar looks like.
5. Anticipate your yearly after-tax and deductions income.
Do you have side-hustles that bring in money? What’s your goal? How much do you generally earn from each paycheck after taxes? Estimate and add it to the income portion of the spreadsheet.
This will also be a very easy way to tell if you’re spending more than you make.
6. Budget as you normally would with your bi-weekly or monthly budgets.
Track everything in those MONTHLY or BI-WEEKLY budgets. Don’t use your yearly budget to track your monthly expenses… yet.
7. At the end of the month, dump all your transactions or transaction totals into your yearly budget.
You can either copy and paste all your transactions into the yearly budget transactions sheet OR you can enter in the total spend for each category in the transaction sheet.
For example, if you spent $150 on transportation with various Ubers, gas, and maintenance fees, instead of listing each transaction, you’d just put the date, total amount spent ($150), and then select transportation from your category dropdown.
If you want to keep track of which pay period it is, you can put the date range into the notes/description portion. See below.
I dump all my transactions into the yearly budget because I like seeing everything I spent money on in one space AND if I get refunds or other credits, I can keep track of it by going back into my yearly budget and either deleting expenses or making notes of refunds.
8. It's also helpful, if you're not paid monthly, to keep track of how many pay periods you've added to your yearly budget.
I do this with a little note at the top of my spreadsheet.
The reason it’s helpful is when you need to adjust your upcoming budgets due to overspending, you can easily figure out how you need to adjust by taking the difference (ie the money you still have leftover in the budget) by the number of pay periods left in the year.
For example, if you have $1,000 left in your grocery budget and three months of budgeting in the year left, you’ll divide $1,000/3 to get $333 available for your monthly grocery spend for the rest of your year. This is something you should look at after each budgeting period to see if you’re on track to reach your yearly goals. I keep track of what I can spend in each category by adding comments to the categories.
Each comment you see below is my adjusted goal for each budgeting period. It changes a lot! That’s okay though–life changes. It’d be weird if we spent the exact same amount of money every month.
TLDR: Why You Need a Yearly Budget To Reach Your Personal Finance Goals
TLDR: Yearly budgets are helpful to keep track of your goals and stay motivated in your personal finance journey. Ultimately, you create a yearly budget in the same way you create your normal budget, but looking at a wider time frame and including periodic expenses like car repairs, insurance, and vacations.
How Do You Plan for Your Yearly Expenses?
That’s pretty much it! Your yearly budget will follow the same process as your normal budget, only you’ll be able to keep track of everything in one place. It’s super helpful as you head on that personal finance journey, and it’s been a total game-changer for my budgeting efforts.
How do you plan for your yearly expenses? Would you ever consider using a yearly budget? Let me know your thoughts in the comments below!
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This is great! I’ve been working on my budget a lot during quarantine and I love the idea of making a yearly budget!
Love this! I’ve also recently started trying to be more financially literate and this is really helpful!
Love this! My yearly budget has definitely been my saving grace at times this year.