Our guide on how to plan a monthly budget consists of five simple steps. Use the table of contents below to jump right to your desired section, or read the entire article to fully comprehend what it takes to create a monthly budget.
Table of contents
Although budgeting can sometimes get pretty complicated and confusing, it’s mostly basic math at the end of the day. For example, if you have $100 and spent $80 on an item, you would have $20 leftover to spend on something else. This would be an example of wise spending as you will have bought the item but still had money leftover. However, if you owed $50 for a bill, then this would be terrible spending. You would not have the money you needed and would find yourself in financial trouble.
Now, this is a massive oversimplification, of course, but it’s how finances work when boiled down to the basics. Spending 100%, or more, of your money is never a wise decision, and this is where the idea of creating a budget can help to reduce spending and increase saving, therefore putting you firmly on the path toward financial freedom.
5 Steps To Planning A Monthly Budget
Planning a monthly budget can be a highly detailed and time-consuming endeavor, but the rewards will make it worthwhile several times over. Extra money being saved each month can go to countless activities that would have never been possible without a budget. A dream vacation, getting out of debt, or buying a home can all be possible if you create a healthy budget and stick to it.
1. Determine Your Income
The first step is to figure out exactly how much money you bring in after taxes each month. In the event that your wages vary from month to month, using an average will be acceptable, but the more accurate, the better, and if anything, use a lesser amount than a higher one. It doesn’t have to be limited to job income: Alimony, child support, interest, dividends, and any other sources of income received monthly should be included.
2. Calculate Expenses
The easiest way to complete this step is to break down expenses into separate categories.
- Start with housing and include rent, mortgage, or whatever the cost for having a place to live. While this is the easiest number to calculate, it will most likely be the most expensive each month.
- Next will be transportation costs. Monthly car payments, insurance and gas costs should be included along with any other potential expenses related to transportation.
- Utilities will be the next category and should include electricity, water, phone, internet, and cable bills. Include any subscriptions here as well, such as gyms or online content subscriptions.
- Last should be food and groceries. Not counting dining out at restaurants, it’s important to get an idea of how much money is spent on food each month. This will be one of the harder parts to calculate but keep grocery receipts for a few weeks in order to get a solid estimation.
- After these categories have been covered then additional information should be calculated as well. Estimate the monthly average spent on clothes, travel, dining out, vacations or whatever extra expenses you may have that weren’t covered before. Also include anything like alimony, child support or other various monthly expenses as well.
3. Calculate The Difference
There are two possibilities for this number: your income is higher than your expenses, and your expenses are higher than your income. If the first is true, then you have already created a sustainable budget, and now it’s just tightening up a little. If the second is true, then you will have some work to do and quickly. One option can be to make more money in order to compensate for the spending. A second job, working overtime, or finding a way to monetize hobbies are all possible options.
However, the easiest solution would be to spend less. Once the expenses are laid out, then it becomes easier to see where the needless spending is located. Rent is something that may be hard to reduce spending on, but buying groceries and dining out can easily be trimmed. Buying new clothes every month and traveling are fun activities, but they can drain money quickly, and when it comes time to tighten a budget, they should be the first to be considered as expendable.
The goal here is to eliminate excess spending in order to maximize saving, and whatever you can do, within reason, to obtain that goal should be considered.
4. Determine Where The Savings Go
Easily the most fun part of this list will be determining what to do with all the money that’s being saved. If you have any existing debt, then the extra money should go towards that. Paying off the debt with the highest interest rate first can save a lot of money in the long term.
If you have no debts to pay off, it will be a good idea to build up savings for a while and create an emergency fund. Calculate how much money you would need in order to survive should you suddenly lose your job. A good emergency fund will have the fund to cover at least three months of expenses.
Once the debt is paid off and a solid emergency fund is built, the options are limitless as long as the spending isn’t reckless. For instance, a dream vacation would be a nice reward for planning your budget and sticking to it for as long as you have.
5. Make It A Habit
As time goes by and income increases or expenses fall, it can be easy to fall out of the habit of making a budget. However, you should make it a habit to revisit your budget at least once a year in order to increase savings while reducing spending.
Retirement will one day come for us all, and it’s always better to have money that you don’t need than it is to need money that you don’t have.
What Is The 50-30-20 Budget Strategy?
There are some budget strategies that won’t require the complex and highly detailed process listed above. One of the more popular budget templates is the 50-30-20 strategy. This strategy means that 50% of your income will go toward needs, 30% will go to wants and 20% goes towards savings or paying debts. The process for this strategy is much more simple:
- Calculate Total Income. Figure out whatever the total amount of after tax income that you make monthly. Using the formula you can now calculate how much you spend in each category. For example, if you make $5,000 a month then you would have $2,500 to spend on needs, $1,500 for wants and $1,000 for savings or paying off debts.
- List Expenses and Place Them Accordingly. Every dollar that is spent monthly on expenses should be accounted for and each item should be listed as either a want or a need. A need is something that must be paid monthly no matter what. For instance, housing, utilities, transportation, food and health care expenses are needs. Wants should be things money is spent on but is not required to live. For example, food is a need but dining out is not. Other examples are alcohol, cable television, new clothes, vacations, memberships, and subscriptions.
- Trim Spending. You will already have calculated your budget by percentage so now it’s time to trim down to fit into it. Even though it may be difficult to do so, especially eliminating wants, it’s important to maintain the 50% for needs, 30% for wants, and 20% for saving or paying off debts.
What Are Other Budget Strategies?
There are many budgeting methods available to anyone looking to tighten up their finances. While the details of the specific strategies may vary, the goal remains the same: minimize spending and maximize saving. Some other budget strategies include:
- Zero-based Budget: This approach builds a budget from scratch and starts at $0 per month. The idea is to justify every expense before adding it to the budget. If it cannot be justified as a reasonable expense then it’s not factored into the budget and the spending is eliminated.
- Envelope Budget: First, cash your paycheck and then place the money into envelopes marked with various purposes such as rent, utilities, and food. Whenever money is needed, find the envelope with the listed and use money from it. This is a more physical way to create a budget and find exactly where your money goes.
- Pay Yourself First Budget: This budget focuses more on savings goals such as retirement instead of expenses. This prioritizes savings while still paying for monthly necessities but can be harsh toward wants and other frivolous spending.
Conclusion on How to Make a Monthly Budget
Creating a monthly budget can be difficult, but it’s fundamental to financial freedom. Although it may be difficult to stick to sometimes, a good budget can help with a lot of financial problems.
You should always be on the lookout for ways to reduce spending and increase savings. Whether it’s by bringing home more income or eliminating needless expenses, a monthly budget can help to show you where your money goes each month. Although challenging to stick to it, the rewards of a smart monthly budget will pay off exponentially and more than make it worth the trouble.