Annual budgets? What are those?

This is not a motivational post. This is a wakeup call. It will be quick and to the point. But it will have no impact if you don’t do this exercise.


Your budget can be like a scary movie, but it seems when we are able to avoid the reality it generally plays out like a soap opera. Doing it month by month (if you even do it) can be like Days of Our Lives. You can go months without doing it and when you go back, not much changed. Maybe you saved two hundred bucks last month, maybe you’re short three hundred this month, maybe you break even for a few months in a row. What does it matter? Let’s do this exercise over a one-year period. Warning! This might feel like a horror movie if it is your first time…

First step is to draw eight (8) rows on a piece of paper with these headings:

  1. Total Target for Savings for 2019
  2. Annual Income for 2019
  3. Balance before expenses 2019
  4. Monthly Expenses
  5. Monthly expenses in Annual terms (monthly x12)
  6. Unpaid bills that will carry over to the next year
  7. Balance after all expenses for 2019
  8. Reasons why I can or cannot achieve the number I wrote down as Savings

Do the math – Let’s look at an example I have drafted

A Total Target for Savings 2019 2000
B Annual Income 2019 9600
C Balance before expenses (= B – A) 7600
D All Monthly Expenses 520
E Annual Expenses (= D x 12) 6240
F Unpaid Bills that will carry over 300
G Balance after all expenses 2019 (= C – E – F) 1060

Note, we put targeted savings before income because this makes you think about the number you want to save, not the one you adjust after seeing your income written down.

So, how do your results look? This is a very different picture to the one you paint for yourself on a monthly basis (if you even do monthly budgets). And this is only for a year. For a start, this gives you insight into your net worth for the year. In other words, if nothing before or after this year mattered, this is what your financial position would be for 2019. For those looking beyond this, those that are more financially astute, have more complicated finances – I know this is a very simple way to look at it. But consider that most people operate within this simple structure and whether your finances are this simple or more complicated, this structure is a great start to see where you are headed in the future.

Now take a look at the bigger picture – this is where you will know if you are living below your means or not: Can your answer in row G (balance after all expenses) plus your savings in A, carry you for 3-6 months if your income had to stop tomorrow? In this example, the answer is yes:

D x 6 months = 3120

A + G = 3060

In other words, the savings plus surplus in this example means this person could go almost 6 months without income and maintain their lifestyle. Six months should be more than enough time to get back on your feet after retrenchment, so it sounds good. But if something more serious should happen, 6 months could be too little. This is very subjective and other things like unemployment insurance, life and disability insurances come in to play, but you get the picture. It differs for everyone. The thing I want you to take away here is that your monthly budget may be blinding you to what the bigger picture is. The bigger picture matters for your long-term growth, your wealth, your security.

Something else to consider when looking at the bigger picture is cars and clothing accounts. I believe these two are serious culprits for deficits in net worth. If you took all your savings plus all your income for the year and deducted your expenses, you should have a surplus. Now deduct the balance you owe on your car(s) and clothing account(s). What does your net worth look like now?

These kinds of exercises take less than an hour of your time to do. You can do them once or twice a year and if you consider the impact it can have over the long term for your financial decision-making, the return on time invested is huge.

Finally, having considered all the above, write down the answer to number 8 – reasons I can or cannot achieve my savings goals. Be honest with yourself. If you can meet the goal, well done. If you can’t, what is causing this? Write the exact things down that are stopping you from saving more. You know the reasons, you know the answers and you definitely know what to do. Do the math and make the right decisions starting today, not tomorrow, today.

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