How to Make an Annual Budget That Works for You

When I first started my budgeting journey, I only focused on reoccurring monthly expenses. I quickly found that miscellaneous items crept up on me throughout the year. The birthdays, vacations, weddings, pet items, etc., that popped up didn’t leave much room for savings or lowering debt. I knew my process had room for improvement, so I did a little research and tested out a few different styles. I finally crafted something that works for me, and I know the concept will work for you. Continue reading to find details on how I prepare an annual budget so those pesky funds don’t take away from my financial goals and/or awareness.

Grouping

I’ve tracked my expenses the past couple of years and have found six groups that stand out.

  • Income – Anything that increased my incoming cash flow. Last year, it was my primary day job, one stimulus check, tax return, and miscellaneous gifts (wedding and Christmas).
  • Taxes – I like to know the taxes I pay. Last year, this was primarily income and property tax for personal expenses. There are plenty of other taxes that can occur. I encourage you to look into your states Department of Revenue website to understand further. For my fellow Alabamians, individual tax info is here and business tax info is here.
  • Foundation – These expenses cover basic needs that are not debt. For me it includes health, housing, additional insurance, transportation, and pet items. I do not have any children, but if I did, I would put their monthly needs in this category too.
  • Debt – These expenses are what I owe, interest charging or not, and must pay back to avoid penalties or negative reports on my credit score. For me it includes loans, credit cards, credit lines, and any money I owe my husband. To be clear, I do not get any negative credit reporting from what I owe my husband. Since I owned the house before we were together, I have all the expenses under me. He pays me at the beginning of the month for a worst case scenario, and I return what wasn’t used at the end of the month.
  • Savings – This group is for money that you set aside for a later use. For me it covers emergency, retirement (401k), health (HSA), and maintenance. There are so many types of savings, but having at lease one short term and one long term savings is highly recommended. If you do not have at least one month of an emergency fund (short term) for your foundation and debt expenses, PLEASE START NOW. I may not know you, but I know that unexpected things happen all the time, and this fund will help out with that. Retirement savings (long term) is sadly often overlooked, but can bring the most return. The sooner you start this, the more your money can grow leading to a less stressful retirement.
  • Fun/Other – These expenses are not necessities, but help with peace of mind, life balance, or any other needs. I believe there should be something set aside for this even if it is $5 a month. For me it includes any contributions to charity, video streaming subscriptions, music subscription, fun food & drinks, miscellaneous items for myself, birthdays, vacations, and Christmas gifts. I also toss any annual fees here like Amazon Prime or specific credit cards.

Now that I have discussed how I generally group my expenses, it’s time for you to try. What is similar to what I have and what may be different? There may be some that could go into two or more different groups. For example, housing. I have a loan covering our house. I put the principle in the debt group and the interest and escrow in the foundation. That way I can focus on how much principle I pay down instead of grouping the other monthly loan expenses with it. Try to think of the governing group and if needed, set up more columns to add other descriptors. Figure 1 below shows this further relative to my life. Remember, I am married with no kids, and my husband and I still have separate checking and savings accounts. This should be used as a reference and modified for your personal/family needs. I love color coding to provide mental notes. Yellow showcases my projected column with the light orange being fixed costs and the light red showing costs that may slightly change. The lighter green are bills that my husband pays and the purple are what I pay. Last, the darker green shows actual numbers from the respective month.

Figure 1. Annual Budget Example

Sinking Funds

So those pesky items… This is where you account for them. A sinking fund is something that you know is coming up and would prefer to set aside funds prior vs after. The benefit to this is that you have more available cash (if needed elsewhere) and could even put it in a savings account to gain positive interest depending how long you are saving. Also, you can avoid paying any credit card or loan interest for the items you pay in full. I have sinking funds for my cat’s needs, Christmas gifts, birthdays, vacations, travel/gas, and annual fees. Some other good sinking funds would be a down payment for real estate, preparing for a baby, home upgrades/repair, and starting a business. The opportunities are endless! All you need is the available income to put aside until the time comes to use it for the designated intent. Keep in mind if you have minimal funds to dedicate each month, saving earlier/longer will help reduce this monthly number.

I would like to say that if you have outstanding credit card debt with high interest, it is recommended to pay that down as soon as possible instead of starting a sinking fund. It may take some time (often years if really bad debt) to be able to start one, but do not be discouraged. Personal budgeting is a journey and if you give up, the problem does not go away. You must be persistent and trust me once you get out, you will never want to go back. I find my mentality shifted greatly in the positive direction once I got ahold of my spending and started planning.

Prioritizing

What needs to be paid first and at what rate (amount/time)? The priority does not directly appear in the figure above, but I know that I don’t mind paying my house, student, and car loans to their full term so I can have funds for other things. I also have 0% APR (limited time) on items that carry a credit balance and another loan for our water softener ending soon. Each of those I have a plan to pay down by the designated date. At this moment, I am more interested in developing savings and sinking funds. This may change in the future, but it reflects where I am at now.

How will you prioritize your funds? Would setting an annual goal help you achieve this? I have another blog post on how I made my annual goals here if you would like more support on that.

Business

This budget is for my personal expenses, however the thought process can be applied towards small businesses as well. I apply this thought process to my business, Functun, and continue to put any remaining personal money into it.

Maintenance

This may be the most important part to fulfilling your annual financial goals and where you may find the most varying resources. I am not here to tell you the best way to maintain your budget, however, I will share what works for me. I like to budget by the half month since my primary income is received on the 1st and 16th. I always designate where my money goes by the paycheck (sometimes more if unexpected income). Otherwise, I WILL SPEND IT. I know myself well enough now to know that I will not set it aside later if there is no purpose designated for it. Note there are plenty of online/apps that can help with budgeting, but I chose to make something specific for me on excel. There is more to the process when you get to the monthly motions. Stay tuned for another blog that will cover how to make a monthly budgeting process that works for you.

Thank you for taking the time to read all the way to the end. Please reach out here to book a free introductory call so I can learn more about you and your personal and/or small business needs. I would be happy to share my excel file and draft a version for you!

XOXO – Mrs. Molly Murphy