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3 Steps To Create A Yearly Budget

Annual budgets aren’t just for big corporations or the wealthy. Whether you’re planning for a vacation, saving for retirement or buying a home, a yearly budget is very important. Even if you want to stop living paycheck to paycheck, you must learn to budget. Don’t make the mistake of thinking that just by spending as little as possible you can take control of your financial life.

When planning your budget, it’s important to be thoughtful and accurate. For example, if you only budget $100 per month for groceries, but the least you can realistically spend is $400, your budget isn’t going to do you any good. Why would you underestimate a spending category like that? Many people make the mistake of underestimating some expenses – usually things they need – in order to spend more for things they want. In this example, you’d budget an unrealistic $100 a month on groceries so you could spend $300 a month on entertainment. 

In order to create a realistic budget, you must first research your cash flow.

First, start by estimating your income, which would be all the money you can expect to earn or receive during a 12-month period. Sources of income include your wages/salary, tips, bonuses, commissions, rents and royalties, disability or social security benefits, alimony and child support. If you are unsure of your annual income because you’re a freelance worker or an independent contractor, it’s always best to underestimate your income to ensure you have enough money to cover your necessary expenses.

Second, you need to research your spending habits. Most banks now have a feature on their banking apps or websites that will break down for you how you spend your money. Make sure you also gather your credit card statements and anything that comes directly out of your paycheck. Knowing exactly how you spend your money is crucial for an accurate budget.

Last, you need to map out your future expenses. Start with your fixed expenses. These are constants like your rent each month, your car payment, your internet/cable bill, credit card payments and student loans. Go through your bank statements and make sure you write down all the recurring payments before you move on to your variable expenses. Variable expenses are things you spend money on every month, but the amount can vary. These are things like your utility bill, which can increase in the summer and/or winter months. Variable expenses can also include things you do not spend money on each month, but you know you will need to set aside money for eventually, like back to school shopping or Christmas presents.

There are several free budgeting tools and apps that can help you achieve your goals, such as Empower, PocketGuard and Goodbudget. Once you have your budget set up, the hardest part is sticking to it. However, once you get the hang of it, you will come to realize you are in complete control of your money and can take that trip you wanted or even pay off student loans you thought would haunt you forever.