How to Create a Yearly Budget

A new year brings a new opportunity to tackle some of the projects on your to-do list and grow as a person. If one of the items on your wishlist is to create a yearly budget, now is the perfect time to get started.

Struggled to keep up with a budget in the past? You’re not alone. According to a recent study conducted by U.S. Bank, only 41% of Americans claim to use a budget, meaning the majority of us are avoiding a step that could drastically help our lives and alleviate future stress. The truth is the advantages of a well-planned budget can’t be overstated. If you create one and stick to it, over time you can lighten your debt load and gain control over your spending.

And this is the year you can finally tackle that annual budget plan for good. Here’s how to get it done:

Getting Started With a Yearly Budget

Step 1: Calculate Your Income

Step 2: Factor Recurring and Anticipated Monthly Expenses Into Your Annual Budget Plan

Step 3: Create Your Wishlist

Step 4: Consider an Emergency Fund

Step 3: See What Is Left Over

Step 4: Think Hard

Step 5: Be Realistic and Cut Yourself Some Slack

Getting Started with a Yearly Budget

“All budgets should contain two main elements,” says Sam Becker, financial writer for the investing app, Stash, “How much money you’re earning, and how much money you’re spending.” Before starting your budget, gather everything you’ll need—pay stubs, bills, and bank statements, and don’t forget any big purchases you want to make in the year to come.

Step 1: Calculate Your Income

Begin by gathering your pay stubs from the past year and adding up all your net income sources. Your net income is your income minus taxes and deductions. If you have a full-time job, you may have only one income. If you freelance or have multiple income sources — say you drive for Lyft but also maintain an Etsy store — make sure to include everything. Income can also include things like child support, Social Security, and interest and dividends earned from investments.

Step 2: Factor Recurring and Anticipated Monthly Expenses Into Your Annual Budget Plan

Next, review your credit and debit card statements from the past year and add up all your expenses, making sure to separate fixed expenses from variable ones. Fixed expenses are expenses that cost roughly the same amount each month, such as your rent or mortgage payments, car payments, or insurance premiums.

Variable (or flexible) expenses are those that occur sporadically throughout the month and vary in terms of amount, such as groceries, restaurant bills, transportation costs, credit card payments and clothing. To find your average monthly variable expense, add three months’ worth of these types of expenses together and divide the total by three. This will provide you with a good estimate of your average monthly variable expenses.

Step 3: Create Your Wishlist

Whether it’s a vacation you’re saving for, or buying a new car, anticipate the cost and include it in your budget with a “wish” label. Don't forget to include your financial goals as well. If you want to pay off credit card debt, for example, you can look at that financial goal as a monthly expense and work it into your budget. We don’t always include our dreams in a yearly budget, but doing so can help make even small things, like a quick weekend away, more tangible.

Step 4: Consider an Emergency Fund

Bottom line: You need an emergency fund. But setting aside the money you could use now for an unknown emergency is tricky without a plan. Look for extra disposable income you could put into your savings each month, even if it is only $10. Commit to an amount and set up a recurring withdrawal from your checking into your savings account to make it happen. It may not feel like much, but any amount of money will build up over time.

Step 3: See What Is Left Over

Start by subtracting your fixed expenses from your income and make note of that number. Now subtract your variable expenses and take a look at your results. If the number is still positive, subtract your emergency fund and wish list and see where you stand.

If you end up with a negative number, you need to rethink your expenses and will need to make some adjustments to your spending habits and monthly expenses. Most likely you’ll need to cut down on your variable expenses, especially those that are “wants” rather than “needs.”

Remember: a negative number doesn’t mean your personal budget doesn’t work — it gives you the power to make the best financial decisions going forward. It can mean cutting back on eating out in order to save for your vacation or picking up a few shifts of part-time work to make up for a cost.

Step 4: Think Hard

LaToya Scott of Life on a Budget recommends going through your expense list and marking your wants with a “W” and needs with an “N.” Then, start slashing your “W” entries. For example, if your cable bill is $200 each month, think about how you can cut it down, find a cheaper alternative, or even go without for a while. If you get monthly mani/pedis or pricey haircuts, try doing your nails at home or finding a more affordable salon or barber. “You want to slash until you’re able to meet all of your needs (“N”) without having a negative balance,” says Scott. The goal is not to make you miserable, but to find cheaper alternatives so you can excel.

If you end up with a positive number, nicely done! However, it’s still a good idea to prepare an annual budget to help you stay on the plus side and develop good budgeting habits. One popular method for those with a full-time salary and regular paycheck is the “50/20/30” rule, which advises separating your after-taxes income into 50% for needs, 30% for wants, and 20% for savings.

Does your income vary from month to month or come from multiple sources? If so, it’s a good idea to plan your monthly budget out ahead as much as possible and to create an emergency fund so you can save money for leaner months.

Not sure how to stay on track — and motivated — once you’ve figured out where and how you can start saving? Not to worry, there are various financial tools, including Microsoft Excel and Google Sheets, plus free yearly budget templates, that are all designed to help make keeping track seamless. You don’t have to go it alone; you just need to take the first step.

Step 5: Be Realistic and Cut Yourself Some Slack

Your first attempt at creating a budget isn’t going to be perfect. Your budget isn’t set in stone, and it’s perfectly fine to make adjustments as you go. Remember: you control your budget; it doesn’t control you. It’s simply a tool to help you manage your money and plan for a better financial future.