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How to Do an Annual Budget Review


When we typically look at spending vs budgets, we look at performance on a monthly basis. Monthly budgets get most of our attention, but it’s important not to forget about doing an annual budget review.

Just like when analyzing stocks, evaluating performance in multiple time frames paints a much clearer picture.

You might have a monthly budget level that you are under budget 50% of the time and over budget 50% of the time. At first glance, the budget level seems appropriate and you’re staying on track.

But that may not necessarily be true.

What if the months that you go over budget are by WAYYY more than the months that you stay under budget? You could be blowing up your annual budget without even knowing.

Of course, you could also be doing really well and also not realizing it.

Monthly budgets in themselves are small sample sizes. Certain types of spending are regular while others are irregular, causing high variance when only looking at the monthly time frame. In addition, how the calendar falls can also skew monthly performance due to weekend spending habits.

Yearly spending is a long enough time frame to remove the noise and provide a much more accurate reflection of expenses. This allows you to better identify improvement areas for both spending and budget setting.

Getting Data for Annual Budget Review

Before you can do any analysis at all, you need to have the data. In order to have the data, you need to be tracking EVERY expense. Or else the data won’t be accurate.

Right now you may or may not to be able to do an annual budget review for 2017. If you haven’t been tracking all your expenses, it’s going to be very difficult to go back and fill it all in.

Don’t worry — no one is asking you to do that.

But what you can do is set yourself up properly for 2018.

All expense tracking methods are not created equal. That’s why I switched from my easy expense tracker which I used for years to my ultimate budget spreadsheet where I record every transaction (not just expenses!) in a General Ledger. Both methods would still work, but one makes your life much easier.

How long does it take me to get my yearly data?

About three seconds.

All I have to do is go to my Trial Balance, enter my desired start and end date, and voila! There are our expenses for the entire year broken down by each expense account.

2017 trial balance expense totals

By just spending about 5 minutes a day updating the General Ledger, I’ve already done all the legwork upfront. I don’t have to sift through months of expenses. Plus, I can do the same thing for ANY time frame I want. If you track your expenses in separate monthly budgets/spreadsheets/on paper, you can still do the annual budget review. It’ll just involve a little extra manual work.

In my full-time job as a business analyst, I play around in spreadsheets all day every day, so I understand how critical it is to have data that is complete and easy to manipulate. 

Then we can actually analyze it.

What Are Your Total Annual Expenses?

Once you have your yearly data, the first thing to look at is your total expenses. This tells you exactly how much it costs to live your current lifestyle. When pursuing financial freedom, this is a very important number to know.

To achieve financial independence, your annual passive income needs to meet or exceed this number. After-tax that is. Or you must have a lump sum to withstand the drawdowns for the rest of your life.

Here were all of our 2017 expenses:

2017 expense account detail

Our total expenses for 2017 were $114,044.01.

That seems like an incredible amount of money to have spent in a year. Especially when you remember that this does not include principal payments on debt because those aren’t expenses!

We currently only have one passive income stream — a rental property — which is performing quite well. Even though we’re still far from having all our annual expenses covered, it’s not that far when thinking in terms of rental properties.

We’re “only” six rental properties from financial freedom.

What Are Your Biggest Expenses?

Now that you’re aware of how much you actually spent, it’s time to look at where this money actually went.

Where are you spending the most?

Just like it’s good to look at multiple time frames, it’s also beneficial to look at detailed versus broader categories. By lumping all these different expense accounts above into more general buckets, I can see the bigger picture more easily.

2017 expense summary

The “Big 3” of expenses are housing, food, and transportation. This proved true for us.

These three categories account for 64% of expenditures for the average American family. If we remove our rental property from the equation, the big three account for 63.6% of our annual expenditures for 2017.

That’s right at average.

Including the rental property inflates our percentage to 70%.

From our list, we can clearly see that Groceries and Dining are two of our biggest expenses. They would be primary targets to look for areas to improve spending behavior.

The secondary targets for us would be Travel, Personal Upkeep, Clothing, and the Miscellaneous category.

Where Are You Most Over Budget?

The biggest expenses serve as a great starting point to find saving opportunities. An EVEN BETTER way to find improvement areas is by looking at spending vs budget for the year.

Where are you OVER spending the most?

Here are our expenses again compared to our annual budget:

2017 expenses spending vs budget

Now we see really see our primary spending issues. The top accounts listed here (most dollars over budget) are also repeat offenders from the biggest expenses above: Travel, Personal Upkeep, Dining, Clothing. From these four categories alone, we overspent by $5,415.97 throughout the year.

That’s a big chunk of change.

Especially since it’s after tax. That’s comparable to $8,000 of gross salary!

The budget vs spending for the broader categories confirms these issue areas.

spending vs budget summary

In order to make the fastest and biggest impact in reducing expenses, these are the best places to start. Focusing on how to lower our water bill would not yield the biggest returns.

What Are Your Spending Patterns?

Once we identify which expense categories are the low hanging fruit, it’s time to dive into the details.

Let’s take a look at one expense category: Dining.

We spent $7,722.89 on Dining in 2017, which was $1,222.89 over our $6,500 annual budget.

I define Dining as all food purchases that are not Groceries and not Lunch. Intentionally breaking out Lunch spending into its own category with its own budget allows me to more easily monitor the spending behaviors because I feel they are slightly different. I did this because I used to buy lunch everyday, realized how expensive it was getting, and wanted to put a cap on it. For the same reason, I created a Drinks category — crazy how much going out can add up when you’re younger.

Since I have every single one of our financial transactions in a single spreadsheet, it’s very easy to isolate transactions for a particular expense. All I have to do is put a filter on.

general ledger dining expenses detail

Then I can scan through the entire year’s list of Dining transactions looking for any noticeable pattern. The thing that immediately jumps out at me is that there are bunch of meals that are close to or over $100.

What is the impact of these pricier meals?

By entering a filter to isolate only meals over $65, I can break down our Dining into these splits:

2017 dining expense breakdown

We had 38 meals that cost $65 or more at an average of $97.36. What’s astonishing is that these meals make up only 15% of our actual Dining transactions, but they comprise almost half of our entire year’s Dining cost.

If we want to stay on budget in 2018, we need to cut back on our expensive meals. Eliminating 13 of these (or about 1 per month) would put us where we need to be. Of course, there would still be a substitution cost because we still have to eat! So maybe 14 or 15 for good measure.

But we can still dive deeper into the data.

Because I include a simple description for each transaction, I can remember each of these meals, which allows me to look for other patterns. What jumps out next to me is that the majority of these expensive meals were not dinners for just my wife and me. They involved other people.

Time to break it down exactly.

2017 expensive meal breakdown

This data is pretty remarkable.

Out of our 38 expensive meals, 29 of them involved going out to dinner with friends or family.

Now we know the real reason we busted our Dining budget: being too social.

What Adjustments Can You Make?

It’s not until we get into the weeds of the data can we truly understand the patterns of our spending behavior. By identifying the causes of overspending, we can then determine how we want to make adjustments:

Change Our Behavior

There are many ways we could change our behavior:

  • Recommend more casual restaurants.
  • Suggest other activities besides nice dinners.
  • Not ordering drinks at meals. Or desserts.
  • Host dinner rather than going out.
  • Decline more dinner invitations.

We could implement any single one of these strategies. Or all of them. Or none of them. We don’t even have to change our behavior if we don’t want to.

Change Our Budget

These meals tend to make up a lot of the quality time we spend with the most meaningful relationships in our lives. That could be way more valuable than the $1,222 we went over budget.

If we prefer not to change our behavior at all, we’re free to make that lifestyle choice and bump our Dining budget up. We can find a different category to cut back on in order to make up for it.

Adjusting a budget may also be required for certain categories where behavior change is less doable. For example, we were over budget on Gas. It’s not like we’re splurging on gasoline over here… we buy what we need. The budget was simply too aggressive and needs to be increased.

Of course, you could also change both behavior and budget.

I’m increasing our Dining budget just a little bit and then placing a greater emphasis on the behavior changes as most also apply to Dining decisions that don’t even involve other people.

Bottom Line

Performing an annual budget review is a fantastic way to gain insights into the true cost of expenses as well as spending behaviors. By having complete, usable data, we can look into the details of any problem spending area and identify the causes of overspending. 

Realistically, this analysis should be done for every single expense category. Don’t neglect areas that are right on budget just because they are predictable. Or even ones where you’re under budget!

In the end, every single category bears asking this question:

How can this expense be optimized?

If you keep asking yourself this question, you will find answers. The data simply makes the answers all the more easy to find. If you want a better idea of how I track everything, you can check out my exact budget spreadsheet.


2 thoughts on “How to Do an Annual Budget Review

  1. Great post.

    Really highlights the importance of making a plan. If you don’t have the data, you cannot make a plan. And we know if we fail to plan then we plan to fail.

    I was a bit worried where you were going after you discussed the dining budget and being too social! I thought you were about to say “Cut off the social activity!” Fortunately, you made note that if you don’t want to change this, you could make changes like choosing less expensive restaurants or lowering another part of your budget. I think this is important as spending time with loved ones is vitally important! But so is keeping your budget!

    1. Haha cutting off all social activity and being hermits would definitely save a lot of money. But it’s important to find the right balance between health, wealth, and relationships.

      And yes, the better the data — the better the plan as well as the decisions we make. It becomes almost self-fulfilling. Thanks for reading!

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