The Year-End Budget Review: Five Numbers to Check Before January

A payday routine keeps a budget on track from one month to the next. This is its annual counterpart: one sitting, a year of statements, and five numbers. The monthly check compares you with last month — and when prices are climbing, last month was already more expensive than January. The annual review is the only point where you compare the year you had with the year you planned. If your own year runs differently — a financial year that ends in March or June, say — hold the review there; the five numbers work in any month.

Bring three things: the budget you set at the start of the year (or your best memory of it), twelve months of account and card statements — or your cash book and mobile-money history, if that is how the money moves — and your current savings and debt balances.

1. How much prices rose where you live

Start with your country’s official 12-month inflation rate, which its statistics office publishes every month or quarter. It is the simplest measure of how much more the same basket of goods and services costs than it did a year earlier. Inflation climbed between January and September in the euro area, the United States, and the UK, and here is where it stood in seven economies at the latest reading:

In four of the six places where we checked the detail, energy prices rose far faster than the headline. In the euro area, energy was still cheaper than a year earlier in January; by September it was around 19% dearer, according to Eurostat. US energy prices rose by about a fifth over the year to September, Canada’s by about 19% with petrol up by more than a quarter, and Australia’s electricity bills by about 13% in the year to August, largely because government rebates ended.

The pattern was not universal. In India, food was the bigger squeeze: food and beverages rose 7.4% in the year to September (provisional), against 5.5% for prices overall and 3.2% for household electricity, gas, and other fuels, and they make up more than a third of the basket. In Brazil neither stood out: food and drink rose 4.7%, against a 4.6% headline, household energy 2.9%, and vehicle fuel 5.0%, but food and drink weigh nearly twice as much as the two energy lines combined.

Where energy leads, that matters for a budget because energy is one of the lines a household can least trim at short notice, and because a line you leave unchanged quietly shrinks when prices move. Suppose home energy and fuel cost 150 units a month a year ago. A 19% rise adds 28.50 a month — roughly 340 over a year — and that money came out of some other line whether you planned it or not.

Two checks follow: First, reprice: go through the statements and set each essential line — energy, fuel, food, rent, insurance, school fees, whichever matter in your household — at what it costs now, not at what you hoped in January.

Second, set your income against prices. If your take-home pay (or, if it varies, your average month) rose by less than your country’s inflation rate, your budget shrank in real terms even though the figure you take home went up. That is no cause for panic, but it is a good reason not to roll last year’s plan forward unchanged.

2. What you actually saved

Next comes the number most budgets never measure: your savings rate. Add up everything you put aside over the year — in a savings account, investments, or a pension, but equally in cash set by, gold, a savings group, or a mobile-money wallet — plus, if you count it as saving, any debt repayment above the minimums. Divide by your total take-home income for the year. Save 3,600 from a take-home of 30,000 and your rate is 12%.

Compare the result with the figure you planned, not with someone else’s. The 20% in the 50/30/20 split is a rule of thumb, and as we found when we tested that rule against official spending data, it sits well above what many households in many countries can manage. The useful question is whether this year’s rate matched your intention, and if not, when it slipped. A savings rate that fell in a year of rising prices usually means the essentials grew and saving became whatever was left — which is the case for moving it first, on payday or whenever money comes in, rather than last.

3. Your buffer, in months — at today’s prices

Take the money you can reach quickly and without penalty — in an account, a mobile wallet, or cash at home — and divide it by what your essentials cost in a month: housing, energy, food, transport, insurance, and minimum debt payments.

The answer is your buffer in months. A common rule of thumb, usually given to households on a steady salary, is three to six months — a heuristic, not a law. If your income swings, you may want more. Either way, the figure that matters is where you sit against your own target.

Do the division at this year’s prices, not last year’s. A buffer of 9,000 against essentials that cost 2,500 a month a year ago covers 3.6 months. Reprice those essentials by 3.8% — the euro-area rate — and they become 2,595; the same 9,000 now covers about 3.5 months. Nothing was spent, yet the buffer got shorter.

If your buffer is thin, you have plenty of company. In the latest US Federal Reserve survey of household finances, 63% of US adults said they would cover an unexpected $400 expense with cash or its equivalent, and 12% said they could not pay it by any means. In the EU, about three in ten people cannot meet an unexpected expense of a set amount from their own resources, according to Eurostat.

The World Bank’s Global Findex, asked only in low- and middle-income economies, posed a different and demanding question: could you raise one-twentieth of your country’s income per person within 30 days? In 2024, 56% of adults there said they could without much difficulty, on average — 60% in Indonesia, 58% in Brazil, 30% in India, 29% in Nigeria. In each of those four, family, friends or work was the most common main source; only 10–16% named savings. These percentages are not comparable with the figures above.

4. What your debt cost you

List every debt — bank loans and cards, but also microfinance, an advance from an employer or a mobile-money lender, shop credit, money owed to family — with its balance and its rate, then find what it actually cost you this year. This is the share of your income that went to paying for the past rather than living in the present.

Where credit cards are common, card debt is where it adds up fastest. The average rate on US credit-card accounts that are charged interest was about 22% in August, according to the Federal Reserve; the Bank of England puts the UK’s effective rate on interest-charging cards at about 21.6%. In the euro area, new consumer loans to households averaged just under 8% in August, the ECB reports. A card balance that hovers around 3,000 at 22% costs roughly 55 units a month — about 660 a year — without reducing the balance at all.

“The monthly check compares you with last month. The annual review compares you with what you meant to do.”

5. What your cash earned after inflation

Last, look up the interest rate on the account where your savings sit, and set it against this year’s inflation. The difference — roughly, the interest rate minus the inflation rate — is your real return: whether your savings gained buying power or lost it.

For many households it is negative. In August, households’ overnight deposits in the euro area paid an average of 0.29%, against inflation of 3.2% (ECB, Eurostat). In the UK, households’ instant-access deposits earned an effective average of 1.65%, against inflation of 3.1% (Bank of England, ONS). In the US, the national average savings-account rate tracked by the FDIC has sat under 0.4% this year, against inflation of 3.4% in August. Put 10,000 in an account paying 0.29% through a year of 3.2% inflation and you earn 29 units of interest — but finish the year about 280 units worse off in what the money buys.

Moving the buffer to a better-paying easy-access account, where you have one to move it to, can be one of the quickest wins in the whole review. Now put numbers four and five side by side. Wherever debt costs far more than savings earn, the gap is expensive, and paying down costly debt is usually the best return available. One caution: don’t drain the buffer to do it. Keep at least a starter buffer, then send the rest at the debt.

Then set January’s numbers

The review only pays off if it changes next year’s budget. Before January, carry the five numbers forward:

1. Reprice the essentials at what they cost now, starting with the lines that rose fastest.
2. Set next year’s savings rate on purpose, and move it as soon as money comes in.
3. If the buffer is short in months, give it a fixed monthly top-up until it reaches your target.
4. Rank your debts by rate, mark the variable ones, and choose a payoff order.
5. Move cash earning far below inflation somewhere that pays more and is still easy to reach.

While the year’s statements are open, list the bills that arrive once a year — insurance renewals, annual subscriptions, the vehicle service, school fees, festivals and family occasions, travel, and gifts. They belong in the sinking funds described in our payday routine: next year’s surprises, paid for in advance.