How To Make A Monthly Budget In 5 Simple Steps

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A monthly budget is a plan for how you’ll spend your money each month. It can help you to spend less and save more. You can create a monthly budget by calculating your monthly income, tracking your spending and then allotting funds to each category based on your financial priorities.

There aren’t any strict rules when it comes to budgeting, though. The one truly important goal is to spend less than you earn each month.

How to create a monthly budget

1. Calculate your monthly income

First, determine how much money you earn after taxes. This is known as your take-home pay. 

• If you earn a steady paycheck, you can multiply the amount in one paycheck by the number of paychecks you receive each month. 
• If you have a variable income that isn’t super predictable month-to-month, look at your lowest-earning month in the past year and try to build your budget off of that.

2. Categorize your spending 

To get a sense of how much money you’re spending every month, look at your actual expenses over the last three months and categorize your expenditures. Not all expenditures will be the same every month — your cell phone bill will be the same, for example, but your grocery bill might change, so keep that in mind.

Common expense categories in a budget include:

• Rent or mortgage payment
• Food
• Utilities
• Gasoline and other transportation costs (parking, tolls, public transportation)
• Phone and internet
• Household supplies
• Insurance premiums
• Streaming subscriptions

Once you’ve covered the last three months of expenses, add any expenses that occur annually or bi-annually that you may not have caught yet, such as car registration or property taxes.

3.  Evaluate your financial priorities

Building a budget is about making sure you can cover your essential spending but it’s also about making sure you’re spending money toward fulfilling hobbies or activities and saving, too. 

As you review your spending, you may find that you spend more or less than you expected in different categories. For example, you could be spending $150 a year on a subscription you rarely use. Could you put that money toward a savings goal that means more to you than the Netflix show you have on in the background?

If you can swing it, make savings a priority by listening to the words of investing guru Warren Buffett who said, “Do not save what is left after spending, but spend what is left after saving.”

4. Design your budget

If your actual spending is already aligned with your goals, you can use your spending history as a guide for your budget. If you decide to completely overhaul your spending habits, you’ll want to build your budget from the ground up instead. 

Choose a budgeting method to get you started. Common methods 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. This may be a good option if you definitely earn more than you need to spend and prefer a very structured budgeting approach.
• Zero-based budgeting: Zero-based budget strategy is built on the idea that every dollar of your take-home pay is assigned a purpose. The result is that your monthly income minus your monthly expenses and savings equals zero. This is not to say you should spend every dollar, but rather that you know where every dollar is going.
• Envelope budget: Also known as cash stuffing, this approach works if you prefer paying for expenses with cash, though there are digitized versions of this method. It involves creating an envelope for each expense category in your budget and using your pay to fill each envelope with the amount of money you have designated for that category. Once you’ve used all the money in a particular envelope, you stop spending on that category.

After you choose an approach, list your spending categories and how much you plan on spending on each. You can do this by using a budgeting app or a spreadsheet (Microsoft Office and Google sheets both offer budgeting templates).

5. Refine your budget as needed

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.

Or you might need to make changes because your priorities and life circumstances may change. For example, you might take on a new loan or receive a pay raise. Review your budget periodically to see if it needs to be revised.

Monthly budget example

Let’s consider how someone might make a budget for a net household income of $6,477 per month. This is the median monthly household income, according to the most recent data from the U.S. Census Bureau.

What happens if you blow your budget?

If you overspend your budget one month, the worst thing you can do is abandon it entirely. Instead, I would treat it as a lesson for next month. Pull up your spending, identify the category where you went over, and ask yourself whether your budget was realistic in the first place. The best budget you can have is the one you can stick to over the long run.

— Hanna Horvath, CFP, managing editor at Bankrate

Why budgeting is important

Regular budgeting carries many tangible benefits, which often include:

• Bills that are paid on time, which not only avoids late fees but can help your credit score
• More money in your savings account
• The means to cover unplanned expenses
• Less overspending and debt accrual

What’s more, checking in regularly with your finances helps ensure you’ll catch any bank errors or fraudulent transactions.

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, review your spending for a few months, noting necessary expenses, unnecessary expenses and where there’s room for savings. Then calculate your expenses against your available income, with the goal of spending less than you earn.