How To Prepare An Annual Budget To Keep Finances In Order

Most of us live our lives paycheck to paycheck. What we earn is what we spend. When our income drops we feel pressure, when our perception on consumerism changes, we go for more spending. And when spending becomes more than income it becomes a bad disease, called debt.

It is important that you should stop living on borrowed money, but it is a reactive decision, a more proactive decision would be to budget your yearly spending right at the beginning of the year. That will tell you how much you need to spend to not to rely on borrowed money. A budget will tell you whether you are going to be infected by indebtedness with a negative cash-flow or you are going to stay financially healthy with positive cash flow.

Why Budget Is Essential To Keep Finances In Order?

A budget would take you to the path of the most basic personal finance fundamentals, earning more and spending less. You need to stick to your spending limit, it is all you need to do from there on once your budget is done.

In first post of the ‘Know your money’ series, I explained the importance of knowing your money. This post is about how to make a annual income/expenditure budget, and I will also give you one ready to use budget template which I use.

Download Budget Template

It is as easy as even a caveman can use it! But, all good tools come with instructions manual, no tool is perfect without it.

The Instructions Manual

Step 1: Estimate Your Income. Fill out all rows applicable to you, if you like to put your net income after tax in place of gross pay, you can do so. In that case you do not have to fill in Step 2, skip to Step 3. This assumes that your withheld taxes are equal to your actual year-end tax liability. If you choose to use your gross pay simply continue to Step 2.

Step 2: Estimate Your Taxes. A very important step in managing finance is to keep data of previous year’s tax filing. Check you last year’s tax return or W-2 form to calculate your total tax in each category. Know your tax bracket by visiting  this Moneychimp.com Knowing tax bracket could help you estimating current year’s tax liability, keep in to consideration your expected wage increase as well.

Step 3: Estimate Your Expenses, Track your day to day living expenses and estimate any other expenses that occur less regularly, keeping in mind any new or different expenses you expect in the near future. Your living expenses will generally fall into one of the categories listed below. This listing, however, is not exhaustive; so create your own categories if you need to.

Step 4: Savings and Investments. List your contribution to various investment accounts, 401K, IRA, CD etc. Read solo 401(k) rules.

Step 5: Summarize Your Cash Flow. From your Total Income, subtract your Total Taxes, Total Expenses, and Total cost of investments to arrive at your Net Cash Flow.

Even if you are not convinced, do still try to down load the document, print and start using. Benefits will be visible pretty early too.

Note: You can use the online budget tools from Yodlee or Mint to set your monthly, weekly or yearly goals, and measure them against actual income, spending and saving. Life is so cool these days! Below is a screen shot from Yodlee budget tool, which I use. Another useful budget tool from Google spreadsheet templates

This is an entire site dedicated to personal budgeting, Contains loads of information, tips and knowledge.

Budget is important, as we only have so much money, we have track it from each cent earned to each cent spent. Readers, how you liked the post of the budget template I offered? Do leave comments and share your suggestions too.