The One Year Budget – How to Plan For Your Best Financial Year

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Forget weekly or monthly budgeting. This one year budget–yes budgeting for a whole year at once–will change your life.

When it comes to budgeting, people tend to think short term–budgeting week by week, paycheck by paycheck, or month by month. This is great for getting a close look at your finances and making sure that you stay on track from month to month. But when it comes to setting and reaching financial goals, there's a much better option: the one year budget.

Budgeting for a year at a time is all about the big picture. It really shows you what you and your money could accomplish in a year if you stick to your spending plan. Having a bird’s eye view of your money is incredibly motivating because the progress isn’t theoretical anymore.

A one-year budget gives you hard numbers that you can see. And when you tie your budget to your life goals–which is what a year-long budget is all about–it becomes a lot easier to stick to because you can immediately see how it affects the rest of your year.

The best part about budgeting for a year at once is that it's a whole lot simpler than piecemeal month-by-month budgets. You use your prior months as a reference and you can forecast future months all at the same time. Here’s how you create a one year budget and plan for your best financial year ever.

What is a one-year budget?

A one-year budget is a budget where you can see 12 months' worth of income and expenses all at one go. Typically our one-year budget runs from January to December because we always create a new one at the beginning of the year (actually we run a five year budget so this year’s budget was really first created five years ago).

Because you’re going to be tweaking numbers as you go, you’re not going to want to keep your one-year budget on paper.

You’ll need to use a spreadsheet.

I promise you this will simplify your whole life and is worth the learning pinhead. It’s not even a learning curve because it’s so easy. To help you out, we’ve create a free budget spreadsheet template for you.  

Step 1. Pre-Work

A one-year budget is a lot like a regular budget in that you need to gather all of your income and expenses to get started. We’ve covered how to start a budget in a previous article, so be sure to check that out if you need a refresher.

Creating a one-year budget, or any budget for that matter, is a lot easier if you’ve already written down how much income you make from all sources, your recurring monthly expenses including all debts, and any irregular expenses.

So let’s talk about irregular income and expenses.

Because we’re budgeting for an entire year at once, you’ll need to look past just your income and expenses for this month and think about other income and expenses you expect to have throughout the year. Make sure to write those down too. We’ll go through how to work those irregular items into your one-year budget as we go.

So many people think that they can’t budget for a year at a time because they have irregular income. That’s not true. Your income may fluctuate, but your bills are going to come due no matter what. So better to plan for them in advance then to have to worry about how bills are going to get paid when the due date is already looming.

Step 2. Add your income to your one-year budget.

If you’ve done the pre-work, then you already know how much income you have coming in, but you might not know how to make that fit into a monthly budget. The income part is probably the biggest barrier for most people when it comes to creating a year-long budget. Most people aren’t paid monthly after all.

The easiest way to calculate your monthly income is to add up your annual income and divide by twelve. The problem with this method is that it can lead to cash flow issues and budget shortfalls in months where your income is naturally lower. You can account for this by always staying a month ahead on your bills. In other words, you always have a month’s worth of income saved up to pay next month’s bills.

Paying this month’s bills with last month’s money is a financial strategy that everyone should be using.

Other options for calculating your monthly income.

Here are some other options for calculating your monthly income for your year long budget based on pay frequency:

Paid weekly: Use four paychecks for each month as your base, then add in the extra paychecks where they would naturally fall in the calendar.

Paid biweekly: Use two paychecks for each month as your base income, then add in the extra paychecks where they would naturally fall in the calendar.

How we calculate our monthly income for our one-year budget.

We are paid bi-weekly, so we use two paychecks per month as our base income amount. Then we add in the extra paychecks and any expected bonuses and raises as they would naturally fall in the year.

Our budget only includes net income, that means our income after taxes, insurance, HSAs, and 401k contributions.

We also include our net income from our online business on a separate line. This income tends to fluctuate a lot, so we use the minimum income that we expect to receive on any given month. As project come up that bump our income up, we make adjustments to the budget as we go.

Step 3. Add your mandatory monthly expenses to your one-year budget.

Now that you have your income in place, it’s time to add mandatory expenses. This includes both regular expenses like your electricity bill and irregular ones like oil changes for your car.

We recommend starting with just your mandatory expenses because you should know how much of a budget surplus that you are working with before you start choosing where to spend it.

Organize your expenses into bigger categories like transportation, housing, etc. to make it easy to keep track of everything. Regularly recurring expenses like your internet and mortgage payment will be easy to add to your budget because they are the same every month.

For expenses like electricity which can fluctuate, you have three options:

• Estimate each month based on prior years expenses
• Use an average
• Use the highest expected amount.

Using prior year’s expenses is the most accurate but is also the most time consuming. Using the highest expected amount is an easy approach but it means that you will likely allocate more money to those expenses than you need to. Using an average is the approach that we typically recommend because it’s simple. But it only works if you don’t spend the extra money every month.

Choose whichever approach works best for your budgeting style and if one doesn’t work for you, try another.

Whichever method you choose, be sure to err on the side of overestimating rather than underestimating. There’s nothing wrong with having some surprise extra cash to put towards your financial goals (or to treat yo’ self) at the end of the month. Not having enough money, on the other hand, is a recipe for debt.

How to budget irregular expenses.

Now let’s talk about how to budget for irregular expenses. We use sinking funds to plan and budget for irregular expenses like car repairs, home maintenance, and personal property taxes (when we had them).

We’d just make a list of all of our expected expenses for the year and divide by twelve. That number went on our budget. Each month we’d put aside that money in a sinking fund so that when the expenses came up the money was already waiting.

Be sure to also include expenses that might not happen every single year. That includes things like replacing car tires and brakes and replacing appliances in your house. Sure, you could wait for those expenses to come up and tackle them in the year that the happen, but that creates unnecessary financial strain in that moment. If your budget allows, we highly recommend having a sinking fund for those every so often expenses because it just makes life a whole lot easier.

Step 4. Calculate your monthly budget surplus.

This is where the fun really starts. It’s time to see what kind of budget surplus you are working with. Now, this might be the part you are dreading the most. It’s rare for us to have as much budget surplus as we wish that we had. But for many of us, that's just a function of not really paying attention to our budget in the first place. We tell ourselves that everything is fine, and then ignore the actual numbers, so we end up not taking action to actually fix it.

Remember, where you are financially isn’t where you need to stay if you don’t want to.

That’s why I say that this is the fun part, no matter what your budget surplus looks like. This is the beginning of you taking control of your money and directing your financial future. Which, as a happy byproduct, results in your taking control of your life by setting goals and being purposeful about your decisions.

Calculate your budget surplus by subtracting your debts from your income. This is how much you have left over every month to use for knocking out some of your financial goals and padding out your lifestyle spending.

Hopefully this number is positive. If it isn’t your immediate focus has to turn to getting yourself to a positive budget surplus. First, look for any errors in the numbers you entered or your math. If the numbers are right, you’ll have to start looking for ways to cut back on your expenses and make more money.

If you have a positive budget surplus, great! Let’s move on to tackling some of your financial goals.

Step 5. List all of your financial goals and how much money you need for each.

Now we’re going to step away from the budget for a minute and figure out what our financial goals are–both short and long term. Things like saving for retirement, building an emergency fund, buying a house, paying off debt.

You’ll want to write all of those goals down and put a number to them. Now this doesn’t mean that you’ll be working on all of them at the same time. Most likely, you’re going to have to choose which ones you want to focus on first.

As someone that hates to choose, I totally get that this process might feel very overwhelming and maybe even a little painful. But it’s necessary. Remember, you’re still making choices even if you don’t feel like you're choosing on purpose. So better to actually take control so you can be sure that you are focusing on the things that matter to you most.

When you’re doing your goal brainstorm, don’t just write down the obvious things like paying off debt and stop. Aim to write down as many as you can think of. I’m talking everything that you want to do in your life that’s going to take some serious financial planning to make it happen.

Want to take an adult gap year? Put it on the list. That trip to Kilimanjaro? On the list. Take a vacation every year? List.

I recommend this for two reasons. First, to recognize that your budget and financial goals go beyond just this week or this month. The decisions you make today impact the rest of your life. Second, to remind you to keep your goals for your life front and center as you are working through your budget. Your budget represents how you are going to make the things that you actually want from your life happen. When you look at it that way, it becomes a lot easier to stick to.

As you are write down your goals, also write the time frame and the amount of money that you think you’ll need to make it happen. You’ll use this information to decide how much of your budget surplus should go to each of your focus goals.

Step 6. Choose your focus goals and start adding them to your budget.

In the last step, you dreamed big and that was awesome. Now it’s time to decide which goals you’re going to focus on first.

Deciding which financial goals to prioritize first is a highly personal decision, despite what one-size fits all plans try to say. Having said that, it’s generally a good idea to include building an emergency fund. An emergency fund will help protect you when the unexpected happens.

But let’s talk about some strategies for prioritizing your financial goals. You could prioritize by time. Are any goals time-sensitive? Things like root canals and getting new brakes can’t be put off indefinitely. So you might want to list those at the top of your focus goals list.

You can also choose to focus on the items that will do the most to improve your overall financial health. If you have a pretty stable job but double digit credit card debt that you can’t refinance, you might opt to rapidly pay off debt instead of building a 3-6 month emergency fund and saving for retirement (though we recommend at least having a one month cushion.

Lastly, you can choose to focus on what will make you happy. For example, if finding a new job is one of your financial goals (yes, this is a money goal) and you are absolutely miserable at your current job, you might choose that above everything else for the sake of your mental health.

Only you can say what your focus goals list should look like. But once you have those in order, you can start adding them into your one-year budget and seeing how much progress you can make on them over the next year.

Now there are a couple of ways you can add your focus goals into your budget. You can choose to focus on one and fully complete it before moving on to another. Or you can choose to work towards multiple goals at once. We typically do the latter. You can read more about some of our financial goals here.

As you start adding in your focus goals you may find that you’ll need to tweak your numbers to make everything fit.

Don’t be disappointed if you can’t fit in as much as you want right now. It’s just right now. I’ve always found as I did my one-year budget that it motivated me to figure out ways to fit in more goals in subsequent years.

Step 8: Add you lifestyle spending to your one-year budget.

Now that your focus goals have been accounted for, it’s time to add in your lifestyle spending. We say to add these things in last because lifestyle spending has this way of easily crowding out everything else.

Have you ever heard of the jar analogy? The idea is that you have all of these things that you want to fit into a jar: rocks, pebbles, and water. If you start with the water, the smallest and least important thing, you’ll be left with no room for anything else. So you put in the biggest things first, the rocks. In this case, your mandatory expenses. Then you put in the pebbles, your goals. Then the water: your lifestyle expenses.

Now, the argument can be made that the goals should be your rocks, and they can and should be over time. But either way, lifestyle expenses will always be the water. They are the things that you can take or leave–even if it’s just for a time–so you can meet your more important needs.

That’s not to say that lifestyle spending isn’t important. It totally is. And you may end up cutting back on other expenses or even focus goals so that you can fit in some of the day to day expenditures that truly bring you joy. That’s okay.

The point is to make your lifestyle choices very deliberate and for you to actually see what you will have to let go of (your focus goals) in order to have it. Facing that decision might lead you to make different choices in the long run.

Step 9: Adjust your budget as you go along.

Your one-year budget is not a one and done kind of thing. It’s a living breathing document that can and should change over time as your circumstances change.

It takes time to figure out what you really want out of your life and out of your budget. Not to mention that as you start accomplishing those focus goals you’ll choose new ones to replace them.

To give a personal example, we’d just settled on what we felt was a fairly accurate 2019 budget when Alexis, our daughter, got her driver’s license and our car insurance doubled, adding an extra $1,200 in expenses a year. We added it in to our budget and took a look at how it impacted our final budget surplus. Since we don’t budget down to the last dollar, we were still okay. But we were prepared to make adjustments in other categories if we needed to.

Because these numbers can change as the year goes on, we highly recommend using a spreadsheet for your budget because it just makes everything go a lot smoother.

So many people who have tried our one-year budgeting method have said that it was just life changing. We hope you think so too. Drop us a comment down below and tell us your thoughts.

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