8 steps to make a yearly budget

27/01/2020
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A yearly budget lets you take a long-term view of your finances. It smooths out the hiccups and lets you plan further ahead than a weekly or monthly budget. And if you don’t have one of those yet either? A yearly budget can be broken down into monthly, weekly or even daily budgets too.

It pays (literally) to have an annual budget. Here’s how to make one:

 

Read more: Is your budget missing discretionary spending?

 

STEP 1: FIGURE OUT YOUR INCOME

The first step in building a budget is knowing how much you have to budget. If you are in regular employment, this is simple: head to paye.net.nz. After you put in your information, this tool will tell you how much you are making annually after tax, as well as a heap of other interesting information. Use the advanced settings to include your KiwiSaver deductions if you are enrolled.

Example of paye.net.nz income summary

If you have investments, benefits or side-hustles bringing in money instead or in addition to regular employment, make sure to add these to the final figure as well. You can use the “calculate as secondary income” option on paye.net.nz as well if you want more info. This is especially useful if you are self-employed in addition to regular employment and want to know your post-tax income.

Example of using paye.net.nz to calculate secondary income

Pro-tip: if all your income is paid into a single account, you can use online banking to quickly find out exactly how much has been deposited in a year. Navigate to your account and filter the transactions by date (1/1/2018 to 1/1/2019 would be a good start) and by type (credit/deposit and withdrawal). Add the credits/deposits together and there’s your income for that year. If you have multiple accounts, make sure to do the same with those too.

Now that you’ve done your own income, you should do your partner’s or anyone else who is contributing to the household budget as well. If you’re just doing an individual budget, you’re all done for this step.

 

STEP 2: FIGURE OUT YOUR EXPENSES

Next is where all that income is going. The best way to figure out your expenses is through your internet banking. Filter the dates to a 12 month period and add up all of the withdrawals. Try to choose an average year that doesn’t have a big spending event like a wedding, honeymoon, funeral or home purchase.

If you want to do this bit quickly - after all, who wants to linger on their spending? - download your bank statement as a .csv and use Google Sheets, Microsoft Excel or OpenOffice Calc to open it. Then use the =SUM command to add them all up in just a few clicks. Not sure how to do that? Check this simple guide.

Alternatively, you can do it the old-fashioned way with a calculator and some patience.

Once done, you’ll have a grand overview of your income and expenses. If your income is larger than your expenses, you’re in the green! If not, there might be some spending cutting to do.

But don’t worry about that yet. The next stage is categorising your expenses to make little ‘mini-budgets’ for each part of your life.

 

STEP 3: CATEGORISE YOUR EXPENSES

Next to each transaction, make a note of what kind of spending it is. Everybody’s categories look a little different, but there are many common ones to start with:

  • Groceries
  • Household expenses
  • Education
  • Debt Repayment
  • Rent/Mortgage
  • Car expenses
  • Medical
  • Insurance
  • Entertainment

There are a few tools you can use which make this easier:

1. If you are using PocketSmith, there’s a tool that helps you categorise all these costs quickly.

2. If you’re using Google Sheets or similar, use the Sort function to sort your transactions alphabetically instead of by time. That way, all the transactions at the supermarket will be next to each other.

Example of Google spreadsheet used as a budgeting tool

Make sure to total these categories so you know how much you’re spending on each category per year e.g. groceries are $5,200 a year.

Once you’re done, you know exactly how much you’re spending on what - and that’s important for figuring out where you can make cuts.

 

Read more: 6 key categories missing from your budget

 

STEP 4: DETERMINE FIXED AND VARIABLE EXPENSES

Fixed expenses are the same every time you pay them. This includes things like rent or fixed-rate debt repayments, but might also include other categories depending on your spending habits.

Variable expenses are the costs that change every time you pay them. Groceries are a good example of this: deals disappear, new ones open up, meals change, ingredients run out at different rates, so your costs at the till change too.

It’s important to know which of your costs is which because variable costs are more easily adjusted than fixed costs. It’s easier to cut down at the supermarket than it is to negotiate your rent down!

Example of Google spreadsheet used for budgeting categories

After you’ve categorised your expenses, make a note next to each category on whether it’s variable or fixed. If a category is a mix of both, note which one it is most of the time.

 

STEP 5: SEPARATE MUST-HAVES VS NICE-TO-HAVES

There are basics in every budget that you can’t avoid spending money on: food, housing, water, utilities, health, and so on. But there are also some expenses that could, if push came to shove, be eliminated. It’s important to know the difference so you don’t remove what’s necessary for what’s only wanted.

Go through your budget and, much liked fixed and variable costs, take a note of what categories are must-haves and which are nice-to-haves. Again, this will be different for each household, and some things that are only nice-to-have will be must-have for others. For example, a weekly netball game for the kids could be nice-to-have for one family, but for another, it might be much more important for the kids’ physical and mental wellbeing, making it a must-have.

Example of Google spreadsheet used to determine nice-to-have and must-have expenses

 

STEP 6: SET GOALS

It’s good to know where your money is going, but the real power of a yearly budget is the ability to set goals for where you want that money to be going.

Think about what you want to achieve financially or personally in the short term and the long term. Here are some examples:

Short-term (<1 year)

  • Going on holiday
  • New appliance or piece of furniture
  • Building up an emergency fund
  • Pay off your credit cards or loans

Long-term (>1 year)

  • Retiring
  • Going to university
  • Saving for a house deposit
  • Paying off a mortgage or other large debt
  • Buying a new car

You can make as many of these goals as you like, but you should have at least one. You should also take the time to pin down a specific figure of how much you’ll need to save to make those goals happen and when you’d like to achieve them by.

Important note: If your budget currently shows you’re spending more than you earn, getting that under control should become your immediate and only goal.

 

STEP 7: MAKE A PLAN

You’ve got a budget and you’ve got goals. Now it’s time to make those goals happen!

1. Check over your budget again and see how much extra you have left over after your expenses. This is your yearly surplus and how much you can put towards your goals.

2. Divide the amount you need for your most immediate goal by your surplus. That’s how many years it’ll take for you to achieve it if you maintain your current income and expenses, setting aside the surplus for the goals.

3. Consider if that timeline works for you. If it’ll take you 200 years to save enough for retirement, that’s not quite going to work!

4. Take a look at your nice-to-haves and your variable expenses and see where you can make some cuts. For weekly expenses like groceries, divide the total expenses by 52 to know how much you’re spending per week instead of per year. This will make it easier to figure out where you’ll be able to reduce your spending.

5. Make those cuts and calculate your budget again to get your new potential surplus. Divide your goal amount by your new surplus and see how much of a different those cuts make.

6. Happy with it? Great! Move onto the next step. Still not happy? See if you can make more cuts.

 

STEP 8: FINALISE YOUR NEW BUDGET

Phew, all done! You’ve now got a yearly budget that not only ensures you don’t spend more than you earn, but also keeps you on-track for your goals. Now you just need to stick to it!

Start by dividing your yearly budget by 52 for a weekly budget, or by 12 for a monthly budget. Stick to these smaller budgets throughout the year and you’ll know you’ll be sticking to the yearly one too.

Next, look at some tools to help out. There are lots of budget tracking tools and methods out there to help you stick to the plan.

One last thing: if you find yourself with a major change in circumstances like a new job, a lost job, a new major debt, an emergency or similar, review your budget. Take the new costs into account. Stay flexible. And review every year as well to make sure your income, expenses and goals are still the same.

Happy budgeting!

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