Financial freedom is something that many Canadians strive to achieve. While it can be accomplished in many different ways (such as through owning real estate), developing a proper yearly budget is something that people of any income level should prioritize.
Otherwise, it’s highly likely that you’ll find yourself being unable to save as much money as you could (or should).
Not quite sure how to begin? We’ve got all the info you need. Let’s explore everything you should keep in mind.
Calculate Your Net Annual Income
Before you can move forward with creating a yearly budget, you’ll need to calculate your net income for the year. For those unfamiliar with the term, your ‘net income’ is the amount of money that you make each year after all of the necessary deductions have been taken out.
The total amount of money that you earn before deductions are taken out as known as your ‘gross annual income.’
While taxes will always be a factor when calculating your net income, you also need to consider other amounts that are deducted from your paycheck. For example, someone who is dealing with wage garnishment needs to consider that factor in their net income.
Once you calculate this amount, you can divide this number by 12 in order to have a better understanding of the average amount of money you make each month. Yearly budgets are best broken up into 12-month segments that you can use as milestones to ensure you’re on the right track.
Allocate a Reasonable Amount to Personal Spending
It may be attempting to save as much money as humanly possible. This often comes in the form of eliminating any expenses that aren’t absolutely necessary.
In some cases, though, people may be going to cut out expenses they were spared all irritated or leisure. Over time, this can drastically impact your quality of life.
This is especially true if the purchase would provide a large amount of value for little cost.
A Netflix subscription, for example, is a recurring monthly expense that typically brings a large amount of entertainment value to its users. If this is a service that you’re interested in, it’s highly likely that the money you spent on it won’t affect you long-term.
Of course, this doesn’t mean that you should go out and splurge every chance you get— this is a surefire way to find yourself buried under debt.
Let Your Long-Term Goals Dictate Your Savings
There’s no perfect amount of money that you should allocate towards your savings account when creating a budget. This number will depend on your long-term goals.
For example, someone who wishes to pay off their auto loan, mortgage, etc. as quickly as possible should allocate more money to the savings account than the average person. If your house is already paid off and you already have enough money to cover emergency expenses, you can get by with saving less per month.
You’ll want to avoid the two extremes of saving all of your money and saving very little of your money.
When saving almost everything that you can, you’ll be sacrificing your quality of life if you don’t have a long-term goal in mind to put this money toward. Without saving any money at all, you may run into issues in the future if unexpected expenses arise.
You may also miss out on potential investment opportunities.
Don’t Forget About Contingencies
Speaking of unexpected expenses, you’ll need to factor those into your budget, as well. Things like auto repair, damage from natural disasters, etc. can easily become a financial burden under the right circumstances.
The same can be said about health-related expenses. You also need to consider creating an emergency fund in case things go awry. For those who are unable to save a sufficient amount, short-term financing is always an alternative option.
In general, as recommended that you have at least six months’ worth of monthly expenses that you could draw from if necessary. This will help give your time to look for a job if your current occupation is no longer a revenue stream.
Make Adjustments When Necessary
Just because you put in the time to develop an annual budget doesn’t mean that it’s set in stone. In fact, it’s highly recommended that you regularly review and revise the budget that you’ve created in order to tailor it to your lifestyle.
For instance, you may find that you don’t need to save nearly as much money as you thought. This is especially true once you’re able to eliminate unnecessary monthly expenses, such as a gym membership, storage unit, etc.
Conversely, you could also find that you need to save far more than you initially planned to.
Regardless of what changes you need to make, it’s important to remember that you should be looking for changes that you can implement. This will help ensure that your budget is as accurate as possible and conducive to your lifestyle.
At the end of each month, take a look at your income and your expenses— if you feel as though these numbers aren’t sufficient, rework them until they meet your needs.
It Can Seem Complicated to Create a Sufficient Yearly Budget
But the above information will make the process far smoother.
From here, you’ll be able to ensure that your yearly budget covers everything it needs to for you to save as much money as possible and control your spending.
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