How to Create a Monthly Budget

A monthly budget is a plan that helps you manage your money and achieve your financial goals. It shows you how much income you have, how much you spend, and how much you save or pay off debt. A monthly budget can also help you track your spending habits, identify areas where you can cut costs, and prioritize your needs and wants.

There are many ways to create a monthly budget, but here are some common steps that you can follow:

Step 1: Calculate your net income

Your net income is the amount of money you have left after taxes and other deductions are taken out of your paycheck. This is the money that you can use for your budget. To calculate your net income, add up all the sources of income that you expect to receive in a month, such as salary, wages, tips, bonuses, commissions, interest, dividends, alimony, child support, etc. Then subtract any taxes or deductions that are withheld from your paycheck, such as federal income tax, state income tax, Social Security tax, Medicare tax, health insurance premiums, retirement contributions, etc. The result is your net income.

For example, if you earn $3,000 per month before taxes and deductions, and you pay $600 in taxes and deductions, your net income is $2,400 per month.

Step 2: List your monthly expenses

Your monthly expenses are the things that you spend money on every month. They can be divided into two categories: fixed expenses and variable expenses.

Fixed expenses are the ones that stay the same or vary slightly from month to month, such as rent or mortgage, car payment, insurance premiums, utility bills, loan payments, etc. These are the expenses that you have to pay no matter what.

Variable expenses are the ones that change depending on your lifestyle choices and circumstances, such as groceries, dining out, entertainment, clothing, gas, travel, hobbies, etc. These are the expenses that you have more control over.

To list your monthly expenses, look at your bank statements, credit card statements, receipts, bills, and any other records of your spending. Write down all the expenses that you have in a typical month and how much they cost. If some of your expenses vary from month to month, use an average or an estimate based on your past spending.

For example, if you spend $800 on rent, $200 on car payment, $100 on insurance premiums, $150 on utility bills, $300 on loan payments, $400 on groceries, $200 on dining out, $100 on entertainment, $50 on clothing, $100 on gas, and $50 on travel in a typical month, your total monthly expenses are $2,350.

Step 3: Subtract your expenses from your income

The next step is to compare your income and expenses and see if you have a surplus or a deficit. To do this, simply subtract your total monthly expenses from your net income. The result is your monthly cash flow.

For example, if your net income is $2,400 and your total monthly expenses are $2,350, your monthly cash flow is $50.

If you have a positive cash flow (surplus), it means that you have more money coming in than going out. This is a good sign that you are living within your means and can use the extra money to save or pay off debt.

If you have a negative cash flow (deficit), it means that you have more money going out than coming in. This is a bad sign that you are living beyond your means and need to make some changes to balance your budget.

Step 4: Track your monthly transactions

One of the most important steps in creating a monthly budget is to track your transactions and monitor your progress. This means recording every time you earn or spend money and comparing it to your budget plan. Tracking your transactions can help you see where your money is actually going and if you are sticking to your budget or not.

You can track your transactions manually by using a notebook or a spreadsheet or automatically by using a budgeting app or software. There are many tools available online that can help you track your transactions and manage your budget easily. For example,

  • NerdWallet offers a free budget worksheet that lets you fill in the categories and automatically see how your spending maps up to the 50/30/20 rule.
  • Ramsey offers a free budget calculator that lets you input your monthly income and get rough estimates for your spending on needs, wants and savings.
  • CNBC offers a free budget guide that explains how to create a budget in five simple steps with examples.
  • EveryDollar is a free budgeting app that lets you create a customized monthly budget in minutes and syncs with your bank account to track your transactions automatically.

Step 5: Make adjustments to your monthly budget

The final step in creating a monthly budget is to make adjustments as needed. Your budget is not set in stone and can change depending on your income, expenses, goals and circumstances. You should review your budget regularly and see if you need to make any changes to improve your financial situation.

Some of the adjustments that you can make are:

  • Increase your income. If you have a deficit or want to save more, you can look for ways to increase your income, such as asking for a raise, getting a second job, starting a side hustle, selling some items, etc.
  • Decrease your expenses. If you have a deficit or want to pay off debt faster, you can look for ways to decrease your expenses, such as cutting out unnecessary spending, shopping around for better deals, negotiating lower rates, using coupons, etc.
  • Prioritize your needs and wants. If you have a surplus or want to achieve your financial goals, you can look for ways to prioritize your needs and wants, such as following the 50/30/20 rule, setting SMART goals, creating a sinking fund, etc.

The 50/30/20 rule is a simple budgeting framework that suggests allocating 50% of your income for needs, 30% for wants and 20% for savings and debt repayment. This rule can help you balance your budget and focus on the things that matter most.

SMART goals are specific, measurable, attainable, relevant and time-bound goals that can help you plan and achieve your financial objectives. For example, instead of saying “I want to save money”, you can say “I want to save $5,000 for an emergency fund by the end of the year”.

A sinking fund is a separate savings account that you use for a specific purpose or expense that you know is coming up in the future. For example, instead of using your credit card or dipping into your emergency fund to pay for car repairs or holiday gifts, you can save up for them in advance with a sinking fund.

To figure out which sinking funds to include in your monthly budget, please read the following: Sinking Funds You Need in Your Budget.

Creating a monthly budget can be challenging at first, but it can also be rewarding and empowering. By following these steps and using these tips, you can create a monthly budget that works for you and helps you achieve your financial goals.