How to Create an Annual Budget in 6 Simple Steps

With the New Year in full swing, many Americans are focused on tightening up their personal finances. One of the best ways to do this is by creating an annual budget. An annual budget can help you prepare for expenses that might go unnoticed in a weekly or monthly budget, such as property taxes, car maintenance, or holiday shopping.

If you have never created a budget before, don’t worry. Follow these six simple steps from American Investment Planners, LLC and you will be well on your way to a solid financial plan.

Step 1: Gather your supplies.

There are plenty of resources you can use to help create your annual budget. Many people utilize electronic spreadsheets or free online tools, while others still prefer the old-fashioned pen and paper. Whatever your method, gather the appropriate tools. Some things you will need include:

• Pen/pencil
• Several sheets of paper
• Calculator
• Electronic budgeting tool (optional)
• Past financial statements including pay stubs, utility bills, credit card statements, etc.

Step 2: Project your annual income.

After you have gathered your supplies, you’ll need to estimate your annual income. This should incorporate all sources of money, including your salary, tips, bonuses, interest, dividends, social security, retirement salaries, tax returns, etc. Once you have determined this number, write it down in big numbers so it is easy to refer back to.

Step 3: Project your yearly expenses.

Now it is time to estimate your expenses for the year. Use last year’s documents for reference, and divide your expenses into fixed and variable costs:

• Fixed expenses stay the same every month. Examples of fixed costs include mortgages, car payments, and insurance premiums.
• Variable expenses differ from month to month. These can include things such as groceries, utility bills, and medical expenses.

If you are unsure of where your money should be going, we recommend using the 50/30/20 rule:

• 50% of your after-tax income should go to needs.
• 30%  of your after-tax income should go to wants.
• 20% of your after-tax income should go to savings and debt repayment.

Step 4: Balance your budget.

Subtract your annual expenses from your income. What are you left with? If you have a negative number, that means you plan on spending more than you make. If this is the case, you will need to cut back on expenses (or find a new source of income) until you are left with a surplus. You can then determine how to spend, or save, your leftover money.

Step 5: Break your annual budget down by month.

Once you have a balanced yearly budget, you can then create monthly budgets to provide a more comprehensive view of your finances. The easiest way to do this is by dividing your total income and expenses by 12, then adjusting for time-sensitive transactions such as taxes or special occasions.

Step 6: Track your cash flow and adjust as needed.

Now that you have created a budget, it’s time to go to work. Keep close tabs on your income and expenses, and refer back to your budget at the end of every month. If there are any major discrepancies, make the necessary adjustments to stay on track for your goals.

If you are still having trouble creating or sticking to an annual budget, consider consulting with a financial planner. The professional advisors at American Investment Planners, LLC have decades of experience helping people just like you achieve their financial goals.

To schedule an appointment with one of our advisors, please call (516) 932-5130 or email info@americaninvestmentplanners.com.