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When it comes to making a budget, one thing that will often trip you up is a lack of understanding regarding what you actually spend. You can start tracking your spending at any time, of course. But if you’ve tracked your spending for a month, you still won’t have a good idea of what your annual expenditure is.
Some expenses are quarterly, annual, or (the worst kind) completely unpredictable. Some seasons are more expensive. And those varying expenses depend on you and your circumstances. Live in a hot climate? Those summer energy bills will be higher, while you’re constantly running the A/C. In a cold climate, utility bills will tend to go up in the winter. If you have kids, back-to-school shopping can be a major annual expense. Depending on how you celebrate the holidays, that can be the most expensive time of the year.
You really need to track expenditure over a year in order to draw up an accurate budget, and even then there will be surprises. If you’re making (or re-vamping) your budget, it really helps if you’re able to do an annual spending review. Here’s how.
Gather your records
One of the reasons I like to put most of my spending on credit cards is that it makes reviewing my annual spending particularly easy. I pay them off at the end of each month so never pay any interest, and I gather various rewards on them, so actually profit from them, just a little, in the long run.
Most of us will need to gather bank statements (maybe from more than one account), credit card statements, and maybe records from PayPal or other third-party payment processors. Unless you use cash for the majority of your spending, you should be able to get a good idea of what sort of things you’re spending on from electronic records.
Your electronic records should indicate how much you’re spending in different areas so you can now categorize expenses. Categories you might find useful include:
- Car payments
- Phone contracts
- Debt repayment
Yes, it’s fine to have fun money in your budget. In fact, it’s essential. You may want to categorize it further though (eating out, family days out, subscription services, date night entertainment, etc).
There are various apps, such as Mint and Personal Capital, that you can use to help categorize expenses. In fact, they work retroactively, so if you haven’t been tracking your spending, you can link these apps to your bank account and credit card, and they’ll categorize expenditure over the previous year.
Now you can take a close look at how much you spent over the last 12 months, and what you spent it on. The amount you spent, divided by 12, is what you need to be budgeting for each month. In the months when your expenses are lower, you now know that you need to be putting money aside for later in the year when expenses will go up. You can do this using a single savings account, a ‘money pots’ account, or any other system that works for you.
Don’t forget to allow for any foreseeable new expenses that will occur over the next year, such as a child starting college, or indeed, expenses that will be coming to an end, such as a debt that will be paid off soon. You now have all the information you need to make a budget that should work for you. There will be surprises, of course. That’s life. Guard against them as best you can with an adequate emergency fund, and good insurance.
The final step
One last step before you make your budget, should be looking at that review and seeing where expenses can be cut. There’s nothing like seeing the evidence of your spending in front of you in black and white to force you to question it.
Even if you can afford your current lifestyle, do you really need all those barely-used subscriptions? Could you switch energy suppliers to save money? Are you actually over-insured? Is eating out that much hurting your finances and your health? Could you consolidate a few of those debts? Once you’ve tweaked your annual expenses, and made even a few reductions in spending that will help improve your finances over the next year, your annual review is done. Congratulations.
About the Author
I’m a freelance writer specializing in online business, personal finance, travel and lifestyle. I also work as a content creator for hire, helping brands and businesses tell their stories, grow their audiences, and reach their ideal customers. I’ve lived, worked and studied in six countries, across three continents. Stop by my blog TheSavvySolopreneur.net to learn how to run your own (very) small business on your own terms. You can also connect with me at my website KarenBanes.com or follow me on Medium.com.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.