MoneySkills with Nelson Letshwene

Money & the psychology of money

How To Write Your Annual Budget | Part 1

THE ANNUAL BUDGET – Part 1

Let us talk about annual budgeting. I call this reverse budgeting because we don’t start with your income, but your expenses. We want a budget that will make you grow, not cause you to shrink. It is clear that the only way to get a focus on your finances is to set an annual budget. Monthly budget does not work only because that time frame is too short.

To get the year off to a flying start, get your annual budget done and this is how you do it:

  1. Write down all your fixed expenses that are going to happen this year. These may include fixed installments that you have,
    • rentals or mortgage repayments,
    • car repayments,
    • School fees
    • any hire purchase repayments.
    • Debit orders and stop orders that you have set in place

These are expenses that will happen because you have made these commitments. Multiply all these by 12 to get the annual figure

  1. Next, add up all the compulsory variable expenses like petrol, groceries, clothing, snacks, entertainment, telephone. guesstimate these for each month and do it for the whole year.
  2. Next you add up all the expenses that happen only once a year. These will include birthdays, car licenses for all cars in the family, and any once off events that will happen this year such as weddings or planned celebrations.
  3. Next include all the things that you would like to happen. These are perhaps new projects that you would like to take on for the year. Your new New Year resolutions come in here. guesstimate the costs involved with these projects. These may be:
    • A new education project – a course you want to do
    • A project you want to do this year

All the other things will happen as part of the continuity of life. But these special projects will only happen if they get a special focus. The reason most New Year resolutions never happen is because they are never included in the budget for the year.

  1. Now write a total of all these costs. This total represents the demand on you in terms of the money you need to expense with this year.
  2. Next, write down the savings and investment plans you would like to make sure happens this year. Life is about growing, and unless you include your growth in your budget, it will not happen by accident.
  3. Now check your totals against your current income. This is what I call reverse budgeting. This is the only thing that will help you or to motivate you to grow.
    • Compare your Annual income now with the totals of all the expenses you have written down
    • Is it a deficit or a surplus?
    • If it’s a surplus, you can use the surplus to increase your investments, or perhaps you can take on another project
    • If it’s a deficit, we need to consider what you need to do next.

This will happen in Part II …

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This entry was posted on January 12, 2015 by in Financial Planning, Personal Finance and tagged , , , , , , , .

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