Do you hate budgeting? Learn a surprisingly simple process how to budget 1-year in advance. You don’t need to plan every single penny. Create a back of the napkin annual budget in minutes!
Budgeting a year in advance is simply amazing. This is part two of a series: Create Your 2022 Budget with Me. Check out part one with five reasons why you need to budget one-year in advance. Spoiler alert- the biggest reason to create a 12-month budget is to reduce your stress throughout the year!
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How to create a back of the napkin annual budget in minutes!
First, I get it: budgeting sounds boring and intimidating.
Like the book, “All I Really Need to Know I Learned In Kindergarten,” most everything you need to know about personal finance you learned in kindergarten: adding and subtracting.
If you can add or subtract, then you can create a basic annual budget on the back of a napkin in minutes. Here’s how with a simple Average Joe example.
1. Calculate your total annual take-home pay
Your take-home pay is what you bring home after taxes and benefits (like health, life, or disability insurance, 401(k), etc.) are deducted.
Depending on how you get paid, some months you might have three paychecks versus two. If your income varies or you’re self-employed you can reverse engineer your pay.
Your income can also include things like rental income, side hustles, bonuses, or alimony.
When creating an annual budget, don’t sweat initially getting the exact numbers. You want to see the big picture first. Then you can nail down the details later each month.
For example, Average Joe’s gross pay per paycheck is $2,160 and his take-home pay is $1,500. Assuming he gets paid every other week his annual take-home pay is $1,500 X 26 (weeks) or $39,000. To pay off debt and have extra cash he gets a side hustle to earn an extra $800 a month (or $9,600 a year).
The total annual take-home pay for Average Joe is then $48,600.
2. Add your total fixed expenses for the year
The next step to creating an annual budget is to list your fixed expenses. Fixed expenses are the same every month.
When you view expenses as either fixed or flex, it’s easy to create an annual budget. Money can feel unpredictable and out of control, but it isn’t.
Most of your expenses are known, literally fixed, and 100% in your control! It isn’t a shocker how much your rent or car payment is because you signed up for it!
For example, here’s Average Joe’s fixed expenses:
- Retirement Investing: $216
- Emergency Fund Saving: $216
- Rent + Utilities: $1,207
- Renters Insurance: $19
- Car Insurance: $89
- Cell phone: $73
- Extra payment to highest interest debt: $300
- Student Loans: $388
- Credit card minimums: $153
- Car payment: $348
Average Joe’s total fixed expenses equal $3,009 a month or $36,108 a year.
1. Plan your flex expenses
Lastly to create your annual budget you’ll see how much’s left to spend on flex or variable expenses. You get this number by subtracting your annual take-home income from your annual fixed expenses. For example, Average Joe has $48,600 (his total annual take-home pay) minus $36,108 (his total fixed expenses), or $12,492 to spending on flex expenses.
Flex expenses can be divided into two subcategories: operating expenses and online spending.
Flex operating expenses
Operating expenses are day-to-day spending like groceries, gas for your car, entertainment, happy hours, new clothes, etc. This is an area people tend to overspend and I recommend using a set amount of cash each week for.
I call this weekly cash. Here’s more on how exactly weekly cash works.
Average Joe decides to spend $120 with weekly cash for his operating expenses or $6,240 a year on groceries, gas, happy hours, etc. (his day-to-day spending).
Flex online spending
Once day-to-day spending is allocated for, this leaves Average Joe with $6,252 to spend on online spending or larger and irregular flex expenses.
Online spending is larger or irregular purchases to make with your debit card like surgeries, repairs, new tires, car registration, renovations, decorations, flights, Christmas gifts, etc.
Online spending can be divided into these categories:
- Medical
- Maintenance
- Projects
- Celebrations
- Travel
- Fun
To create your annual budget, you need to spend the most time on mapping out these flex expenses.
Here’s Average Joe’s Annual Online Spending Budget
Medical
- Therapist every other week ($25 copay X 24) = $600
- Prescription copay ($10 X 12 =$120, but will use weekly cash to purchase) = $0
- Contact Lenses: $200
- Unexpected Vet Visit: $800
Total Medical: $1,600
Maintenance
- Car Registration: $75
- Toll Tag: $50
- New Tires: $575
- Unexpected Car Repair: $500
Total Maintenance: $1,200
Projects
- DIY Home Office + Decorations: $350
- Circular Saw: $99
- Used paddle board: $150
Total Projects: $599
Celebrations
Birthdays
- (Use weekly cash for friends, niece, nephew, Aunt, Uncle, etc.) $0
- Mom: $50
- Dad: $50
- Sister: $50
Weddings
- Carl + Stephanie’s wedding gift: $50
Brain’s Wedding + Groomsman Costs
- Tux rental: $150
- Bachelor party: $200
- Gift: $50
Christmas
- Family Secret Santa: $75
- Family White elephant: $25
- Friends’ White elephant: $25
- Niece + Nephew: $50
Total Celebrations: $775
Travel
Seattle Trip
- Flight: $250
- Hotel (assuming it’s split with friends): $200
- Site seeing and extra spending money: $150
- Church retreat: $90
Total Travel: $690
Fun
- New laptop: $550
- Concert: $75
- College football game: $140
- Running shoes: $75
- Winter clothes update: $150
Total Fun: $990
Flex Online Spending extra buffer: $398
How annual budgets make your money goals a reality
This method of budgeting a year out prioritizes investing, emergency saving, and debt pay off. Instead of afterthoughts these are setup as automatic non-negotiable fixed expenses.
A standard personal finance tips is to pay yourself first! Most people know saving money’s a good idea. What happens in reality is you pay your rent, utilities, cable, internet, groceries, have a few happy hours with friends, buy a new thingy mer-bob, and then comes the end of the month. There’s nothing left to save.
Back of the napkin annual budgets give you a margin of error.
In this Average Joe example, he’s building his emergency fund throughout the year (saving $216 a month). If mayhem strikes and there’s a financial emergency, like a visit to the ER or car repair, instead of swiping a credit card and adding to his debt load, he has money in the bank!
In addition to the $216 already accumulating from previous months, there’s $216 from the current month and $300 is allocated to pay extra to debt. For the month with an emergency, Average Joe can temporarily use those funds to cash flow the financial emergency.
In a nutshell, this is $516 a month buffer!
Your next steps to create an annual budget
Grab a napkin and use this process to create your own annual budget. Start with your income, then fixed expenses, and you’ll spend the most time on flex expenses.
You can crush your 2022 financial goals. Schedule your free 15-minute money coaching session with me on Dec 20 or 21! Only nine spots available. Save your spot here!
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