A monthly budget is a framework for your financial life. With a budget, you can allocate your income to various expenses and spending categories, making it easier to stay on target and make wise financial choices.
Essentially, a budget lets you outline where your money needs to go every month. Along with helping you assess your financial state, it can reduce missteps like late bill payments or overspending. If you’re wondering about how to make a monthly budget, here’s how to tackle it in eight easy steps.
1. Total Up Your Income
When you’re ready to put together your monthly budget, the first step is to total up your monthly household income. Create a list of every income source, including traditional jobs, side gigs, support payments, disability payments, retirement payments, or anything else you’re receiving each month.
For income sources that aren’t the same amount every month, you have two choices. First, you can use the lowest amount you’ll receive in a month, essentially giving you a cushion during higher-income months. Second, you can average out how much you usually receive.
With the latter approach, you will need a plan for handling lower-income months. One option is to set aside money during higher-income months to cover those periods. That way, you have a buffer.
2. Create a List of Your Bills
After you total up your income, it’s time to list all of your bills. This includes any monthly obligation, including rent or mortgage payments, insurance, utilities, car payments, and similar expenses.
For fixed bills – those that are the same amount every month – list the cost associated with the expense. For variable bills – such as credit card payments or usage-based utility bills – you can handle these in one of two ways.
In many cases, the best option is to list the highest amount you’ll owe, as it ensures you don’t accidentally fall short during high-cost months. Alternatively, you can calculate an average using data from the past year, though you’ll need a cushion to tackle higher cost bills when they occur.
As you create the list, also write down the due date for the bills. That way, your budget can serve as a payment guide, reducing the odds that you’ll accidentally pay late.
3. Calculate Your Average Spending
Once your bills are listed, it’s time to estimate your spending in variable categories like groceries, dining out, fuel, and entertainment. Begin by averaging out how much you spend in each of those areas per month, using data from the last year, if possible, or the previous three months if you don’t have access to 12 months of information.
When you calculate your average spending, don’t forget to include any purchases in these categories made with credit cards. That ensures you’re tracking all of your related activity when creating the average.
4. Plan for Periodic Expenses
Everyone has expenses that occur regularly outside of a monthly schedule. Vehicle maintenance, like oil changes, is a prime example, as well as certain home maintenance costs. Some other common periodic expenses are holiday gift shopping and back-to-school shopping. Seasonal wardrobe spending can also qualify, as well as tuition for college or private K-12 schools and sports or activity fees.
Think about every periodic expense you need to tackle during the year, as well as how many times you have to pay it annually. Then, add up the yearly cost and divide it by 12. That lets you know how much you’d need to set aside each month to make these costs manageable.
You can also factor in periodic expenses that are handled every few years (or even decades). Large home maintenance projects like roof replacements are a solid example, but they aren’t the only ones. By estimating these costs and dividing them by the number of months until you’ll need to pay them, you can determine how much you should save monthly to cover these expenses in your budget.
5. Outline Your Savings Goals
Most people have a few savings goals they’d like to hit. Having a robust emergency fund is something everyone needs, so it makes a solid goal. You might also need to set money aside for retirement, a down payment on a home, replacing a vehicle, taking a vacation, and more.
Consider what financial savings goals you’d like to hit. Additionally, estimate how much you’ll need to save to reach the target. Finally, list them in order from most to least important.
If a goal is time-sensitive – such as needing to achieve it by a specific target – you can divide the required amount by the number of months before that date arrives. That lets you know precisely what you’ll need to include in your budget. If a goal isn’t time-sensitive, you can choose an amount to set aside later based on the remaining room in your budget after your expenses and spending are addressed.
6. Write Your Monthly Budget
Once you have all of the information above, you can start writing your monthly budget. Using a spreadsheet is an easy option, particularly since it can perform calculations. However, you can also use a budgeting app if you prefer.
If you go with a spreadsheet, begin by listing your income at the top. Next, put your bills onto it in order, based on their due dates. Put the date in the first column, the name of the company in the second column, and the amount owed in the third column.
In the fourth column for your first bill, subtract the amount owed from your income and write the remaining income amount in the fourth column. For the second bill, deduct the amount owed from the remaining income listed alongside the bill above it. Continue that process until every bill is accounted for and you know how much money you have left for other types of spending.
After that, you’ll write in your variable categories, as outlined in step three. Use the same four-column approach as you did with your bills, though you can forgo the due date if you prefer. Next, add your periodic expenses and savings goals using the same format.
7. Make Adjustments If Necessary
As you do the calculations for the fourth column on your monthly budget spreadsheet, you can see if your income will cover everything based on the data you collected. If it does, then you can simply follow that framework, or if you have money left over, allocate those extra funds until you assign all of your income to a purpose.
If your income falls short, you’ll need to determine where you can cut back. Examine your variable spending and savings goals first, as those are often the most flexible.
If you cut those down as low as possible and are still coming up short, it could be time for more drastic cuts. Consider how you can reduce or eliminate any expense.
For example, can you get a better rate by changing internet providers or home, renter, or auto insurance carriers? Would canceling an entertainment source – such as extra streaming services – cover the deficit? Could you take public transit to reduce your costs?
You could also determine whether boosting your income is possible. Could you get more hours at work or secure a raise? Would adding a side gig or second job be plausible?
Continue working on the problem until you develop a budget that meets your needs. Just make sure you don’t unrealistically reduce a spending category to the point where sticking with the budget isn’t possible. The numbers only help if they’re realistic, so keep that in mind.
8. Review Your Budget Regularly
Once you have your budget in place, you’ll want to review it regularly. Along with using it to ensure you’re staying on target, you need to track your actual expenses and spending. That way, if the allocated amount proves unrealistic, you can make adjustments based on any new information you collect for the following month.
Continue tweaking your budget every month until you reach a point where it works. After that, you can still use your budget to stay focused but forgo making adjustments until the need arises.
Ultimately, your budget is a living document, so it’s never completely finished. Even if your budget is working, plan to thoroughly review it every six months at a minimum. That way, if your needs, goals, or priorities change, you can alter your strategy to ensure your monthly budget keeps working for you.
