Key takeaways
- A budget is a financial plan that helps you manage your finances, so you know exactly how much you are earning, spending and saving.
- Having a budget helps you meet financial obligations such as paying your bills, preparing for any unplanned expenses and meeting your savings goals.
- Budgeting can help you boost your emergency fund and your savings and stay out of debt.
Making a budget helps you plan for expenses, and it can provide insight into your spending habits, allowing you to consider areas where you can cut back. A budget can also allow you to make a game plan on how to allocate more money to your savings.
If you’re looking to build your first monthly budget, or want to revise one you already have, here are some tips.
What is a monthly budget?
A monthly budget is a plan for how you’ll spend your money each month. Monthly budgets are popular because many recurring expenses occur on a monthly basis, such as rent, utilities, credit card payments and other loan payments.
Ideally, the budget you create will involve spending less than you make each month, allowing you to save money. Also, when your expenses don’t exceed your earnings, you won’t need to tap into savings or borrow money to make ends meet.
A budget helps you plan for expenses before they happen, rather than hoping you have enough money to cover essential costs or emergencies. Budgets can also make you more mindful of your spending, as you prioritize your spending on things that are important to you over what’s less important.
How to create a monthly budget
1. Calculate your monthly income
The first step is to determine how much money you earn after taxes. This will determine how much you can spend (and save) each month.
When calculating your monthly earnings, look at consistent sources of income. You should include your paycheck from your day job, but should probably exclude less consistent sources of money, such as selling old items you no longer need.
Make sure you calculate your earnings using your net income, also known as your take-home pay. This is the money you have left over after taxes and payroll deductions.
The following formula can be used to calculate net income:
Gross income – taxes, retirement contributions (such as 401(k) or pension), insurance premiums = take-home pay
2. Track your spending for three months
One of the best ways to get a sense of how much you should budget for is to track your actual spending over the course of a few months. Various budgeting apps can help you track spending by linking to your bank account, or you could track spending manually by saving receipts and adding up expenses yourself.
As you track your spending, you may find that you spend more or less than you expected in different categories. This is important because it is a good lead-in to the next step in the process.
Don’t forget to budget for expenses that may occur annually instead of monthly. You should account for expenditures such as property taxes, car insurance payments, doctor or veterinary visits and vacation costs.
3. Think about your financial priorities
Once you’ve spent time tracking your spending, it’s time to review your spending history and how it aligns with your financial priorities.
Everyone has expenses they can’t avoid, such as housing, food and transportation. However, if you aren’t keeping an eye on your spending, it’s easy to overspend on nonessential things. For example, you may find that you’re spending hundreds of dollars each month on takeout meals or have an array of monthly subscriptions you rarely use, from streaming services to gym and club memberships.
Building a budget isn’t about limiting yourself to only spending money on essentials. Instead, it’s about allocating your money in the way that makes sense for you. Once you see how much you’re spending on certain things, you might want to try adjusting your spending habits to increase your savings or put more money toward fulfilling hobbies or activities.
4. Design your budget
To design a budget, list the line items that correspond to each spending category. It’s smart to pay yourself first, so be sure to include a line item for savings, whether it be for an emergency fund, retirement goals, a new car, a down payment on a home or other purposes. When it comes to savings advice, take the words of investing guru Warren Buffett who said, “Do not save what is left after spending, but spend what is left after saving.”
Common expense categories in a budget include:
- Rent or mortgage payment
- Property taxes
- Car payment and car maintenance
- Gasoline and other transportation costs (parking, tolls, public transportation)
- Food
- Utilities
- Phone and internet
- Childcare
- Insurance premiums
- Debt repayment (credit cards, student loans, other loans)
- Medical bills
- Tuition fees
- Home maintenance
- Gym membership and other subscriptions
- Entertainment and hobbies
- Clothing and personal care
- Travel and gifts
- Household supplies
- Pet supplies and pet medical expenses
Next, look at your spending habits and see how they line up with your priorities. If your actual spending is already aligned with your goals, you can use your spending history as a guide for your budget. If you want to completely overhaul your spending habits, you’ll want to build your budget from the ground up instead.
There aren’t any strict rules when it comes to budgeting, though, as long as you spend in a way that’s satisfying and helps you reach your financial goals. The one truly important guideline is to spend less than you earn each month. Even if you can’t save 20 percent of your income, get into the habit of saving as much as possible.
Common budgeting methods
There are several popular budgeting techniques or strategies to choose from. Familiarizing yourself with the options can help you better identify an approach that works best for your lifestyle and needs. The most common budget approaches include:
50/30/20 rule: The 50/30/20 budget rule calls for dividing your after-tax income into three separate categories: 50 percent for needs, 30 percent for wants and 20 percent for savings.
Zero-based budgeting: The idea behind a zero-based budget is that every dollar of your take-home pay is assigned a purpose. The result is that your monthly income minus your monthly expenses equals zero. This is not to say you should spend every dollar, but rather that you know where every dollar of your monthly income is going.
Pay-yourself-first: As the name implies, the pay-yourself-first budgeting strategy focuses on depositing money into savings for yourself first, before paying any bills or buying anything. Next, you pay your bills. And finally, the money that remains can be allocated to your wants or entertainment.
Envelope budget: The envelope approach can be a good option if you prefer paying for expenses with cash (though there are digitized versions of this method). Also known as cash stuffing, this approach involves creating an envelope for each expense category in your budget. Use your pay to fill each envelope with the amount of money you have designated for that category or expense. Once you’ve used all the money in a particular envelope, you stop spending on that category or expense. If you are keeping your funds in cash, keep in mind that it is lacking the protections that come with an FDIC-insured bank account (such as theft or a natural disaster). Also, you lack the opportunity to earn interest, as you could with a high-yield checking account or high-yield savings account.
5. Track your spending and refine your budget as needed
A budget is a living document that can be changed over time, as needed. Once you’ve built your budget, you should continue to track your spending, follow your spending plan, and make any adjustments to your budget.
As time passes, your priorities and life circumstances may change. For example, you take on a new loan or you receive a pay raise. Review your budget periodically to see if it needs to be revised.
Monthly budget example
Using the steps outlined above, let’s consider how someone might make a budget for a net income of $4,000 per month. Remember that net income is the money you have for a budget after subtracting taxes and deductions. The net income can include earnings from a full-time job as well as any passive income or side gigs.
It might be helpful to organize each line item by priority. The first priority in this budget is savings, which is followed by needs or essentials, and then by wants or nonessentials.
After making the budget, you’ll want to track your spending to see how actual expenses line up with predicted expenses. Then, adjust the budget accordingly to make up for any differences.
| Category | Line item | Amount per month |
|---|---|---|
| Savings | Emergency fund | $300 |
| Vacation fund | $200 | |
| Retirement | $200 | |
| Total | $700 | |
| Needs | Rent | $1,200 |
| Transportation | $400 | |
| Electricity | $60 | |
| Gas/oil | $30 | |
| Phone | $60 | |
| Internet | $40 | |
| Groceries | $270 | |
| Personal care/hygiene | $40 | |
| Other bills | $100 | |
| Total | $2,200 | |
| Wants | Streaming subscriptions | $70 |
| Dining out/ food delivery | $250 | |
| Apparel | $100 | |
| Nightlife | $100 | |
| Movies/theater | $50 | |
| Gifts | $100 | |
| Miscellaneous spending | $430 | |
| Total | $1,100 | |
| Total for all categories | $4,000 | |
Why budgeting is important
Regular budgeting carries many tangible benefits, which often include:
- Bills that are paid on time
- More money in your online high-yield savings account
- The means to cover unplanned expenses
- Better ability to avoid overspending
- Peace of mind from knowing your finances are in order
What’s more, checking in regularly with your finances helps ensure you’ll catch any bank errors or fraudulent transactions.
Budgeting resources
- Budget apps: These can help with some of the monotonous work associated with budgeting. Budgeting apps such as EveryDollar come with digital tools that can monitor your spending, track savings goals and provide insight into where you can save on certain expenses.
- Savings accounts: One of the most important line items of a budget is savings, so a savings account is a must. Find an account that earns a competitive annual percentage yield (APY) and that either doesn’t charge a service fee or makes this fee easy to avoid.
- Checking accounts: While money in a savings account is for various savings goals or emergencies, a checking account is where money for daily spending is kept. If you’re looking to open a new account, you may also be able to take advantage of a bank account bonus.
- Budget calculator: Bankrate’s home budget calculator does the work of figuring out what your net income is after you account for each expense category. It also suggests ways you can save more money.
- Microsoft Office template: This budget template is an option for those who prefer manually making a budget over digital services, and it’s free with Microsoft 365. It outlines the various spending categories for a single household — you just fill in the cells with each expense amount.
Bottom line
Making a budget is an effective way to keep up with your spending, gain a better understanding of your financial habits and incentivize saving. Before creating a monthly budget, track your spending for a few months, noting necessary expenses, unnecessary expenses and where there’s room for savings. You’ll calculate your expenses against your available income, with the goal of spending less than you earn.
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