Annual Budgets – Why You Need One and How To Get Started

Jan 27, 2023 | Personal Finance | 2 comments

annual personal budget - how to financially plan for the year ahead

An annual budget is a powerful tool to help you plan ahead for the future, and stay organized throughout the year. While it can seem overwhelming at first, with the right approach you can start benefiting from an annual budget in no time!

In fact, we might be the only ones, but we find it a bit odd that Annual Budgets are not more popular in personal finance. Understandably budgets aren’t everyone’s favorite thing. Budgeting month-to-month can be challenging enough. So the idea of budgeting for an entire year stresses a lot of people out! But as a couple, we prescribe to the whole “run your personal finances like a business” approach. So in our personal lives it was just another business tool we wanted to use in our personal lives. 


Our first Annual Budget was incredibly helpful. We loved that we could view our entire year in one spreadsheet! (finance nerds rejoice!) We immediately gained clarity about what our plan for the year was actually going to look like .We were able to make informed financial decisions like, eating out less so we could afford to travel more. It helped us gain clarity and prioritize things that we really cared about and wanted to do and align how we used our money with our values. It even helped us figure out when we would be able to afford taking a Gap Year and start our own business!


“That insight was priceless. It even helped us figure out if we could afford to take a Gap Year or start our own business!”


So uhhh yeah, we’re big fans of Annual Budgets! By the time you’re done reading this, we think you will be too! 


Who Should Use an Annual Budget?


Using an annual budget is a huge step in your financial journey! It’s a helpful planning tool as you start to look at your financial picture with a wider perspective. But before you consider “jumping into the deep end” with an Annual Budget. We suggest that you first master using Monthly Budgets. Here’s why…


Without having the habit of consistently using a budget, creating an annual budget might be a waste of your time and energy. We know because we see it all of the time! New clients bring us massive spreadsheets with all sorts of “data” – but no rhyme or reason to it. While they’ve made a great effort to gain helpful insights. When it comes down to it they struggle to interpret any useful information. Other times, what they have created is functional. But without the habit tracking progress and viewing their budget as an active document, they never looked at it again! 


Since pulling together an accurate and useful annual budget takes considerable time and know-how. We suggest that you learn to master your monthly budget first. We have a great resource that will help you do exactly that –  Check out our course about Budgeting and Cash Flow. This course will help you build a solid foundation and a practical understanding of how to budget effectively. Once you are consistent with this practice and understand the concepts, an Annual Budget will be much easier to create, and have a larger positive impact on your financial strategy.


Although we do not recommend an Annual Budget for beginners, we do suggest setting the goal of using one in the future. As you budget every month, make notes of any periodic expenses so you can plan for next year. Keep your notes in a place where you can review them later and start to put together an annual budget, gradually. That way you can use your annual budget to make big picture plans and decisions that help you reach your financial goals.


Why is an Annual Budget Important?


We like to view your Annual Budget as your intentional financial plan for the year. Using an Annual Budget will give you a high level overview of what is ahead. As you can imagine, this is incredibly helpful for a 360° plan that gives you clarity on what to plan for and expect.


Benefits of an Annual Budget


Creating and using an annual budget is an important step in managing your finances. When done properly, it can help you ensure that you are optimizing your income and using your money wisely. But what are some of the most specific benefits of using an Annual Budget?


Make Better Financial Decisions


An annual budget will give you a “30,000 foot view” of your financial picture for the year ahead. This financial overview of your year is incredibly helpful when planning for necessary annual expenses. By viewing your finances from this perspective, you will find it easier to make better financial decisions for you and your family. Being able to view everything in one place helps you set priorities, identify oversights, even overages or miscalculations. All things that are harder to spot with month-to-month planning.


Be Proactive With Your Finances


Most importantly, an annual budget will help you be proactive, rather than reactive. With a well thought out Annual Budget, you can avoid “surprises”. Expenses such as periodic bills, insurance premiums and annual fees can disrupt a monthly budget. Being proactive and planning for these expenses ahead of time helps you know what to expect. Eliminating the disruption of progress toward other needs or goals.


Set SMART-er Financial Goals


Whether it’s paying off your debt, maxing out your retirement contributions for the year, an annual budget helps you set more effective financial goals. Which increases the odds of reaching them! By having this elevated view of your personal finances, you will be able to see exactly how much money you will be able to allocate toward your goals in the next 12-months. Using an annual budget ensures that all financial obligations are considered. Allowing you to set realistic goals and take consistent action toward reaching them.


Establishing your Priorities

Vacations, home remodel, replacing an unreliable car. Outside of the easily defined steps to financial freedom – is real life! Not planning for these expenses is a plan to fail. When it comes to using an annual budget, knowledge is power. It gives you the information you need to realistically plan for the year ahead.

Easier to Budget Month-to-Month


Use your Annual Budget as a “Master Document” where monthly budgets are archived and things like periodic expenses noted. When used this way you will find it far easier to create accurate monthly budgets throughout the year. Saving you time and effort in the long run!


Important Things to Include in Your Annual Budget

Saving & Investing


Just as you would in your monthly budget, you need to Pay Yourself First. Throughout your Annual Budget, be sure to first prioritize your savings and investment strategy. Putting the amount going to savings and investments at the very top of your budget. This helps ensure that you make consistent progress toward your goals, rather than “saving whatever is left”and leaving your progress up to fate. Plus you’ll be able to set realistic expectations based off your annual income.


Large Purchases


New home, investment properties, cars, etc. With the exception of an emergency situation, large purchases can and should be planned for ahead of time. Whenever you create your annual budget, try to think about any large purchases you will need to make in the year ahead. Include these large purchases in your budget and in the rest of your financial strategy.


Home Improvements & Upkeep


Use the annual budget to plan for the regular maintenance of your home, make a list of the projects you know need to be completed and prioritize them in order of importance. From there you can start to establish a budget and determine how much you need to allocate in your annual budget toward these expenses.


In addition to maintaining your home, this is a great opportunity to plan for those dream home improvements. Your annual budget can be a helpful tool in determining if this is the year you will be able to afford replacing the deck, or the kitchen remodel you’ve been wanting.


Tuition Costs


If you are a college student, or are a parent to one, you need to be mindful of tuition costs and other expenses associated with being or having a student. This may include room and board, books, tutors, and additional costs incurred with extra curricular activities. Planning for these known upcoming expenses ahead of time will help you take the steps necessary to ensure tuition payment deadlines are met.


Travel & Leisure


If you want to travel and have fun without a “travel hangover” (credit card debt) then your annual budget is the way to make that a reality.


Budgeting for vacation is important for more than just your health and wellbeing. It can actually help you stick to your budget! Travel and leisure is important to include in your budget because it gives you something to look forward to and that keeps you motivated. With that extra incentive most people find it far easier to forgo nights out drinking, cut back on eating out, or other non-essential expenses.


Read our 10 Favorite Money Saving Travel Tips here


Donations and Giving


The best way to make a significant impact with your generosity is by planning your donations on an annual basis. Doing so oftentimes results in giving more generously than if you hadn’t planned ahead. This also allows you to identify organizations you want to donate to ahead of time, which helps you prioritize giving to the programs most important to you.


Other Periodic Expenses


Life Insurance premiums, Annual Fees, etc. These periodic expenses can create hiccups when not planned for ahead of time. Putting these expenses in your Annual Budget can help prevent being caught off guard and ensure you don’t miss important deadlines.


This can also allow you to consider money saving strategies. Such as paying cash for your car insurance 6-months at a time and securing a discount!


Common Mistakes with Annual Budgets


Not Knowing How to Use Your Annual Budget


Your Annual Budget should be an actively updated document, not just a list of bills and due dates. The point of creating an annual budget is to reference it throughout the year. This ensures you’re hitting your goals and that you’re not overlooking anything important in your monthly budgets. 


Try to make it a habit to review your annual budget whenever you create your budget for the month ahead. Make any updates necessary regarding periodic bills etc. for the previous month. Then take note of and plan for expenses in the month ahead.


Forgetting About Your Annual Budget


As we mentioned before – we see this mistake a lot. A client will invest a lot of time and effort into creating an annual budget. Only to never look at it again. Making this a giant waste of time. 


If you decide that you want to use an annual budget here are a few tips to help ensure you actually use it! 


  1. Write down reminders to review it in your planner or digital calendar. 
  2. Save the document to your favorites in Google Drive to keep it from disappearing into the digital abyss.
  3. Save the link to your budget on the Bookmarks Bar of your internet browser.


We talk more about how to use your annual budget, below.


How to Create Your Annual Budget 


You can really take one of two approaches when it comes to creating your annual budget.

All at Once


If you want to create an annual budget and start using it for your planning this year, here’s how to do it…



Download account statements from the past 12 months for all financial accounts that you use for spending or paying bills (checking, savings, credit cards). 



Create “Spending Categories” based on your spending habits. Use these categories to set up your Annual Budget and organize your expenses. 


Examples of Spending Categories: Savings and Retirement, Housing, Utilities, Groceries, Insurance, Restaurants, Automotive/Gas/Maintenance, Services, Household Goods,Personal Care, Debt Payments, Misc.



Using the downloaded account statements, total up how much you spent on each category per month. 


Example: Eating Out in January = $246; February = $198; March 2022 = $212; 



Enter the amount for each expense category per month in the Annual Budget. 



Once all fields have been filled, review total expenses for the year. Then, use this information to make any necessary adjustments and well informed budgeting decisions.


Gradually – Over Time


Alternatively, you can gradually collect information at the end of each month. Compile the data over time and at the end of the year you will have a great starting point for the year ahead. 


This method of gradually building your annual budget is definitely the easiest. But there is no realized benefit for 12-months. 

Calculate Your Annual Income


After you have decided if you want to create your budget all at once or over time, you need to calculate your annual income.


Consider all streams of income and when you receive payments from each. Be sure to include all sources of income, your primary job, side hustles, investments, rental income, etc. Don’t forget about windfalls like set bonuses and tax refunds. However, it is better to be more conservative in the income side of the budget. For that reason it is a good idea to omit bonuses that fluctuate or that may change and do not plan for raises in your income.


Once you have a total figure for your expected income, it’s time to move on to the next step.


Calculate Your Annual Expenses


After calculating your income, you need to do the same for your annual expenses. Use the step-by-step process we walked you through earlier in this article. 


Consider Financial Goals


After you have determined what your annual income and expenses are, review your Financial Goals for the year. This will allow you to ensure your goals are realistic and your plan is sound. Will you be able to make the contributions to saving and investing that you had hoped? What changes will need to be made so that you make realistic, and steady progress?


How to Use Your Annual Budget


Now that you have created and calculated your Annual Budget, it is time to actually use it. 


Update Through the Year


Continue to make notes about annual expenses, changes in your income, etc. throughout the year. This will help you make necessary adjustments in real time. While also helping you save a ton of time creating your annual budget next year!

Use Your Annual Budget to Make Better Financial Decisions


Use your annual budget to make better, well informed, financial decisions. Reviewing your personal finances all in one place, helps you determine if, for example, you can afford a large purchase now or need to save up and buy it later.

Use Your Annual Budget For Next Year


One of the biggest benefits to an annualized budget is to use the data for each month as a template. Using the information from last year as a reference for the same month this year.

This way you don’t have to do twice the amount of work! 

Should You Use an Annual Budget?


Yes! Everyone can benefit from using an Annual Budget. You can create an annual budget at any time in your financial journey, or at any time of the year! It is a great way to plan ahead and determine what actions you need to take to ensure the needs of you and your family are met.


However, we do consider using an Annual Budget as being rather advanced. This is because the gathering of the data and a useful interpretation of the information, can be difficult and downright overwhelming. For those reasons we view the use of an Annual Budget as a progression of your financial strategy after gathering a lot of data over time. While it might sound terrifying to those who still struggle maintaining a monthly budget, it is a great goal to work towards! 


Which is why we suggest that you first master using a monthly budget. But if you decide you are up for the challenge,  following the steps above can make it much easier. And with careful planning and discipline, you can create a successful annual budget that helps you reach your financial goals!


  1. Elizabeth Orhosa Braimah

    Pursuing blogging as a writer and a business owner has been exhausting, but reading this has been an empowering experience for me. Whatever you do, set your mind right first and head on. I have another one with information on the power of financial planning for business growth. Your website is doing so much to help people with your content and I appreciate you for that.

    • Dylan

      Thank you Elizabeth! Creating an annual budget, espcially as a business owner is so helpful. Just knowing how to plan ahead for year and variable income can make a big differnece.


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