How to Create a Monthly Budget

Do you have a budget in place? If you’ve clicked this article, the answer is likely no — or maybe you do, but you’re looking to improve it. Well, come join the majority! In a survey of more than 1,000 Americans conducted by Debt.com, 80% of people said they have a budget, up 12% from 2019.

As Howard Dvorkin of Debt.com said, “It can’t hurt you to budget, but it can definitely hurt you if you don’t.”

Here are some budgeting basics.

What is a Budget?

A budget is a spending plan for a defined period based on income and expenses. The period of time is up to you and your goals, such as a monthly budget or a bi-weekly budget that aligns with a pay period. Budgeting is an essential money management tool, as it helps ensure a person reaches their short- and long-term financial goals.

How to Budget Money

Simply put, a budget requires you to calculate your monthly income, pick a budgeting method and monitor your progress.

Step 1: Determine Your Net Income

The first step to creating a budget is noting the amount of money you generate from your income stream(s). Remember to account for taxes and other payroll deductions, such as Social Security, 401(k) contributions and flexible spending accounts — this is your net income.

Step 2: Track Your Spending

Begin by listing your fixed expenses. These are your regular bills such as rent or mortgage, utilities, car payments and insurance payments. Next, list your variable expenses. These change month to month, and include necessities such as groceries and gas, but also things like entertainment and shopping. If you’re working backwards to determine a budget, your credit card and bank statements often itemize all monthly expenses. If you’re working forward to achieve your monthly budget goals, record your daily spending in a notepad, on your phone or using an app.

It’s helpful to categorize your spending so you know where you can make adjustments to achieve your goals, which we discuss in the next step. It’s unlikely you’ll be able to cut back on fixed expenses, but there will be opportunities in your variable expenses. 

Step 3: Set Your Goals

Make a list of the financial goals you want to achieve in the short- and long-term.

Short-term goals should take no longer than a year to achieve. Examples of short-term goals include reducing credit card debt, saving for an upcoming vacation, buying a new car, etc.

Long-term goals may take years to achieve. Examples of long-term goals include saving for retirement, saving for your child’s education, purchasing a home, etc.

Step 4: Make A Plan

Your budget is almost complete. Now that you’ve determined your income and spending, see where you have money remaining from your net income(s) to allocate toward your goals.

If you find that you need to cut back on spending, look at your variable expenses first. If numbers still aren’t adding up, see if you need to adjust your fixed expenses. Perhaps you can decrease your rent by looking for a new place to live, or cut car insurance costs, for example, by shopping around for discounts.

Small savings can add up to a lot of money, so don’t overlook the minor expenses… or minor advancements towards your goals.

Budgeting Methods

If you need help creating organization around your budget, here are two budgeting methods you can adopt and utilize to get started.

50/30/20 Rule

Allow up to 50% of your after-tax income for necessities. Allocate no more than 30% of your income for wants. Commit 20% of your income to savings and debt repayment.

Envelope System Budget

Using cash and envelopes, divide your income into different spending categories. Once you decide how much to spend on each category, place that amount of cash in that designated envelope. Then, only spend what’s available in that envelope for that category. Optional: Any money leftover in an envelope after the budget period can be moved to “sinking funds,” a fund for a future expense or repayment of a debt.

Revisit Your Budget As Needed

Whatever way you choose to budget, one thing is for certain: Your income, expenses and priorities will change over time. Remember to adjust your budget accordingly, but always have one in place. 

You can also compare your monthly expenses to people similar to you, using this Spending Analysis tool from Bank of America.