As 2020 comes to an end I’m sure we have all begun planning for a better 2021. I don’t know about you but, I have some big plans for next year and in order to make these goals a reality I need a long-term plan, which is why I am now creating my yearly forecast.
Short term month to month budgeting is great, but without the big picture of the year it’s a lot harder to stick to your saving targets. A yearly forecast will allow you to note all your known spendings and tie your goals to a monthly figure. This will hopefully make planning your saving a lot easier.
The best part is once you have your yearly forecast it is so easy to create your monthly budget and accommodate for random monthly expenditures.
How to start
Firstly, you will need to gather all your income and expenses, this will include any once a year purchases and incomes, such as insurances, yearly subscriptions and dividends. It is also beneficial to keep a note of the month these once a year purchases are due to be paid so you can budget accordingly the first year.
As this will be for a year I would suggest creating an excel spreadsheet for this as you may need to edit and move items around in the coming sections.
Add your income to your yearly forecast
If you have an irregular payment this will require a little more work.
Paid weekly: I would suggest using 4 paycheques as your monthly budget and then divide the extra paycheque’s according to how many days are left per month.
Paid biweekly: Again, I would suggest using 2 paycheques per month and then divide any extra paycheques accordingly.
Me and J both get paid monthly so we use our paycheques as our base and then will add dividends and bonuses on the months they are due to be paid.
Add all mandatory expenses
Using the list you created earlier add to your budget all of your mandatory expenses, whether they are a yearly payment or a reoccurring monthly payment.
I suggest separating your expenses into categories such as housing, transportation, pets, etc. This will help you identify any expenses you may not have listed.
For fluctuating payments there are a few options on how to prepare for these; you can estimate using the previous year’s expenses, use the average of all payments from the previous year or base the expense off of the highest amount charged.
Each option has its own pros and cons therefore this will be a personal choice. I chose to use the average for the previous year, but this will only work if the surplus for each month is left in your account rather than spent. Again, this is a personal choice so chose the method you believe will suit you and switch it after a few months if it is not working.
SideNote: Our tax, National insurance and my pension are already deducted and therefore will not be included in our budget.
Me and J use a sinking fund for any expenses which will happen, but potentially not this year. This includes replacing appliances, birthdays and Christmas as well as car maintenance. We estimate the potential cost over a year and divide this by 12. You have the option to wait for the issues to arise and deal with them as the happen, or save month by month for a nice cushion. Depending on the left-over finances I would recommend creating a sinking fund.
I count an emergency fund as a required expense, this is a savings pot that you can dip into when there are genuine emergencies, such as loss of a job or your car unexpectedly breaking. It is suggested that this savings pot should hold at least 3-6months worth of expenses, therefore we add up our expenses times this by 6 and this is the total for our emergency fund. As me and J are not currently at the 6 month mark we continue to save a reasonable amount as a non-negotiable expense.
Budgeting your monthly surplus
This is when the fun begins. Now the hard part is out the way you will now be able to deduct your expenses from your income and the remainder can be used for your personal spending and goals.
If there are no surplus funds left over, don’t panic first check that there are no errors in any of your calculations. If there is still no surplus this just means you will need to reevaluate your expenses and potentially make cuts. The last thing you want to do is leave yourself without any “fun money”.
With these surplus funds, you should focus on topping up your goal pots, whilst also leaving yourself a small amount of funds for your own discretionary spending. My personal preference on goal priority is as follows: clearing debt, time sensitive goals and then I split the remaining funds between my long and short-term goals.
Adjust as you go along
Now that your yearly forecast is complete!
It takes time to figure out what you really want out of your life and out of your budget, therefore I would suggest using the figures in this forecast when creating your monthly budget.
So much can change in a year, there can be new incomes added or monthly expenses can change so be prepared for updates. At least once this is finished you have a clear idea of where your finances are heading and can be ready to tackle any obstacles that may appear!
Have you ever done a yearly budget forecast before? Let me know how it went in the comments below!