Annual Budgeting

As the third entry in the financial freedom series, let's walk through how to create and live on a budget.

No political intent here.
Simply trying to be
a little humorous.
I'm actually a fan.

The main thing to keep in mind about a budget is that it is NOT a straight jacket.  A budget actually enables us to make the most of our income.  A budget is simply planning ahead to decide how we are going to spend our income.  That's why a budget is better known as a spending plan.

A budget also:

• Increases predictability in household finances.  
• Lessens the number of surprises.
• A budget helps us get in control of our finances instead of them controlling us.

The result is more peace and harmony at home.










Now, lets get down to the nuts and bolts of how we do budgeting.  As you know, some expenses occur every month.  Other expenses occur at various times throughout the year.  Therefore, we need to do Monthly and Annual budgets.

Annual Budgeting
Use an escrow account approach for expenses that are predictable, but not monthly.  Start with a calendar and list all the known expenses you will have for the year.  Record an estimate of the amount of each expense and the dates when the money will be spent.  Here are some examples of common expenses that belong in your annual budget.

I'll bet you can think of several more not listed here.  See what these expenses all have in common?

• They do not happen every month
• They are predictable in terms of when they will happen.  In fact, you can put them on the calendar
• They are (for the most part) discretionary in terms of how much you spend

Dave Ramsey calls this type of expenses Lump Sum Expenses.  See his page on this subject here.  You can also print off a free form from this page for managing Lump Sum Savings.

Example Annual Budget Sheet

Here's an example of a spreadsheet that can be used to help capture and track our annual budget items.  You certainly don't have to use a spreadsheet for your annual budget, but I have found it useful as opposed to a pencil and a notepad because changes can be made quickly and easily.  

Here's the steps to creating your own annual budget.

1. List all the known irregular expenses you will have for the upcoming year as a line item on the annual budget sheet.  Refer to the examples above.  Remember not to list monthly expenses or expenses you are not sure whether or not they will actually occur.  Record an estimate of the amount of each expense and the dates when the money will be spent.
2. Add the whole year's worth of projected expenses up.  In the example above, the annual total is $3,175.
3. Divide the annual total by twelve.  This is the amount you will need to save each month for annual budget items.  In the above example, $265 per month will need to be set aside in order for the family to have the money they need for the expenses when they occur throughout the year.

Note that the annual budget works just like the escrow account associated with a typical mortgage loan.  In most mortgage loan situations, the homeowner's mortgage payment includes the loan repayment amount plus an extra amount equal to 1/12th of the annual homeowner's insurance premium and property taxes.  The mortgage company takes the extra amount paid by the homeowner each month and saves it until the insurance premiums and tax payments are due.  This is exactly the same as how the annual budget works except it is you setting aside the funds and spending the money when it is appropriate to do so, not your mortgage company.

I recommend keeping your annual budget funds in a separate account from all other household funds.  In other words, keep it simple and easy to keep track of.  Don't mix these funds up with money that has any other purpose.  E.g. Don't put your Emergency Fund money in the same account as your Annual Budget money.

If you would like to have a fully functional electronic copy of the example annual budget spreadsheet above emailed to you, send a request to jim.sweatt@gmail.com.  Please indicate in your email whether you would prefer to receive your spreadsheet in Excel (Windows) format or Numbers (iOS or MacOs) format.

Next up in this series, Monthly Budgeting.