I remember sitting in the credit counselor’s office like it was yesterday. I had $50,000 in debt and no idea where my money was going every month.
Her suggestion was like a foreign language to me, but she said it was the only solution to reach financial success. She told me to make a budget.
Years later, I know budgeting was foundational in my financial journey. If you’re struggling and need to develop a plan for your money, this guide can help you get started.
How to Make a Monthly Budget
Budgeting is often viewed as restrictive. However, it allows you to control your finances and freely spend money in accordance with your financial goals.
Before you start, you will need to collect a few pieces of information. This includes:
- Bank statements
- Pay stubs
- Credit card statements
- List of your monthly bills
If possible, have at least three months of the above pieces of information. This will help you have a better idea of what you spend and earn each month.
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With those in hand, it’s time to create a budget.
Calculate Your Income
The first step to starting a monthly budget is determining how much money you make each month. This is not your gross income. Instead, it is your net income.
Your income will include the take-home pay from your day job plus any money you earn through a side hustle.
Don’t overlook other streams of income. If you earn funds from sources like disability, Social Security, or even alimony and child support, include those as well.
The idea here is to identify your total monthly income. If your income varies each month, average the amounts to get a better idea of what you earn.
Having this information is essential as it lets you know what you have to work with. Furthermore, if your expenses exceed your income, you need to reduce your spending.
Track Your Spending
After calculating your after-tax income, you must determine how much you spend each month. This includes everything you spend money on, from your rent to the occasional coffee you purchase on the way to work.
It’s best to list all of these expenses so that you don’t overlook anything. This should include both known and variable expenses.
Fixed expenses can include the following:
- Utilities (gas and electric)
- Internet bill
- Cell phone bill
- Cable or other streaming services
- Debt payments
You will then want to include the variable expenses that you have each month, such as:
- Charitable giving
Your variable expenses may look different, so this is meant to give you an idea of some things you could classify as variable.
It’s best to average your variable spending over the course of several months to get an idea of what you truly spend.
You can use budgeting apps like Personal Capital to monitor your spending. Our favorite platform is Tiller. It connects to your bank account and puts all of your expenses in an easy-to-use spreadsheet.
Alternately, you can manually write down your monthly expenses. However, many find that using budgeting apps is a simpler way to manage your personal budget.
Regardless of your choice, tracking your expenses is essential if you’re on a fixed income. Read our guide on how to save money on a tight budget to identify actionable ways to cut costs.
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Determine What’s Left
Now that you have your monthly income and expenses, you want to subtract the two to identify where you stand. The goal is to have money left over.
Having extra money at the end of each month lets you save money in your emergency fund, grow your retirement fund, or reach other goals.
However, if you’re falling short, it’s time to revisit your spending habits and spend less each month. This can be an overwhelming feeling, but it’s doable.
Instead of looking at the gulf as a whole, identify simple changes you can make to quickly reduce the shortfall. This will build the confidence you need to lower your monthly bills across the board.
Read our guide on the top ways to save money every month to identify potential ways to spend less.
You can use our sample budget template below to start a basic plan. Input your monthly income in the “Salary 1” field.
If you have a partner, put their salary information in the “Salary 2” field. Any income you earn on the side should go in the “Miscellaneous” section.
Then, fill out the expense fields with the costs that apply to you. After you supply all of the information, you should see a surplus or deficit line on the bottom right of the spreadsheet.Download Our Free Starter Budget Template Now
What to Do With the Remaining Money
Spending less than you make is a terrific position to be in. It provides the ability to reach savings goals and pursue financial freedom.
Managing what you have remaining is just as personal as a budget. You want to use these funds to work towards achieving what matters most to you.
- Saving for a house down payment
- Debt repayment
- Saving for a family
- Investing for retirement
- Saving for a large expense
Living by a budget is an excellent resource to use to help you achieve those goals. Before you work towards them, make sure you’re growing your emergency savings to handle any unexpected expenses.
It’s best to automate your saving to work towards your goals. Most banks allow you to do this for free, and it is simple to set up. It also ensures you won’t forget to save.
*Related: Read our guide on how to budget for buying a house when you’re in the market for your first home.
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Rinse and Repeat
Living on a budget is not a set-it-and-forget-it situation. Your spending patterns may change, or you might earn additional income you weren’t planning on in your initial budget.
It’s best to reassess your budget at least semi-annually. If you’re working to build your first monthly budget, you want to analyze it weekly. Once you’re comfortable, you can revisit it monthly or quarterly.
*Related: Want to save more money? Check out our guide on bill negotiation strategies to follow to garner more savings.*
This lets you optimize your spending and ensures that you’re giving every dollar a purpose. Don’t let this overwhelm you. It’s not a difficult process.
Using a budgeting app is an easy way to streamline it and requires only minutes of your time each month.
Furthermore, this helps you avoid merely making ends meet. Read our guide on how to stop living paycheck to paycheck to identify ways to create surplus in your budget.
Choose a Budgeting Method
It can be challenging to choose between the available budget systems and methods. There isn’t an approach that’s superior to others, but there might be one that is a better fit for you.
What matters most is that you start and manage your money in a way that helps you reach your goals. Here are three popular budgeting styles.
Zero-based budgeting is a good choice if you want to give every dollar a purpose. You allocate all of your money to expenses, monthly savings, repaying debt, and other goals.
If you don’t currently watch your spending, this is a good approach to use. Think of it as an ongoing movie of all your spending.
However, a zero-based budget can take quite a bit of time to manage. Furthermore, if you have recurring expenses that regularly change, it may not be the best choice.
You Need A Budget (YNAB) is a fantastic budgeting app to use if you choose this approach.
Read our Mint vs. YNAB guide to learn more about how the two services compare.
Cash Envelope Budgeting
Cash envelope budgeting is a traditional method of managing your cash. My wife and I used this strategy when we were first married, and it helped us reach various goals.
With this method, you pull out cash every time you’re paid and assign it to a spending category. You can read our article on budget percentages by category to understand what these should look like.
Using this method helps you avoid overspending. It also helps you avoid overdraft fees.
However, you may not want to carry cash around or find it too burdensome to manage.
Qube is a helpful app to use if you choose this approach.
*Related: New to writing checks? Check out our guide on how to write a check for step-by-step directions.*
A percentage-based budget is a good choice if you want to simplify things and only deal with a few spending categories. The 50/30/20 method is the most popular choice.
Here’s how it works:
- You allocate 50 percent of your income to needs like housing and food
- You allocate 30 percent to wants like travel and entertainment
- The remaining 20 percent goes towards savings and debt repayment
The beauty of this approach is that it lets you have a framework to work with that’s flexible. It also puts a devoted focus on saving and repaying debt.
Read our guide on how to pay off debt quickly if you need to eliminate indebtedness.
However, it may encourage overspending if you’re a high-earner. Additionally, low-income people may need to spend over 50 percent of their income on their needs.
Mint is a good app to use if you want to use this approach. Read our guide of the best Mint.com alternatives to learn more about it and other potential choices.
How to Stick to a Budget
You’ll notice one key thing as you learn how to budget money. It’s likely you’ll find that it can be difficult to live within your means at times.
That’s ok and is something many people experience. A budget should give you freedom and not countless hours stressing over your finances.
The best way to stick to a budget is to regularly check it and reduce expenses where possible. As you’re starting out, look at your budget weekly. You’ll soon learn you can move that to monitoring it monthly.
If you find that you’re not getting value out of an expense, look for ways to reduce the cost. Then you can reallocate the savings to a different goal, expense, or your emergency fund.
The goal is to spend your money in line with your values and allow you to live the life you want. Don’t hesitate to give yourself small rewards for reaching important goals.
Living on a budget is an important step to take to manage your finances wisely. It allows you to see where your money is going and ensures that it’s in line with your goals.
Done sensibly, a budget gives you the freedom to live as you want. Just ensure you personalize it to accomplish what you need.
How often do you check in on your finances? Save
Holly Johnson says
Great guide! We use a monthly zero-sum budget. It’s not hard, but it does take a few hours of work every month. It helps us stay on track and keep track of our spending over all.
John Schmoll says
Thanks Holly! Y’all have a great system working for you and the limited amount of time is well worth the work.
Amanda @ centsiblyrich says
Having that reason, or goal is so important. And you’re right, the goal must have meaning to you personally. No two people will have the same reason for paying off debt.
I spend about an hour a week on our tracking expenses. I don’t have a strict budget, but automatically save as much as I can and live on the rest – similar to the zero-sum budget.
John Schmoll says
” No two people will have the same reason for paying off debt.” – could not agree more Amanda. You’ve got to find what works for you and run with it.
I think budgets are a great idea but I haven’t found the resolve to make one for myself. I do think I’m pretty good at limiting my expenses as it it so I’m not particularly worried, but I know that’s not an excuse. One thing I would add to a budgeting exercise is to add the ‘savings’ header right after the ‘income’ header. This would force me to spend money only after I have met the mandatory savings target for the month.
Great walk-through, by the way!
John Schmoll says
As long as you’re on track for what you should be doing is the key in my opinion. Some don’t like living on a budget and that’s more than ok, but if you’re financially stable you very well may not need one.
DC @ Young Adult Money says
I love how this post came from a family member asking you a finance question. I LOVE listening to friends and family members because oftentimes I walk away with a post idea. This is quite the monster post, John, and I think a lot of people will find it really useful.
John Schmoll says
Thanks DC. Yea, family and friends can be quite the resource for blog post ideas – now if some would just listen. 😉
Early Retirement in 2019 (Already Retired) says
Great post! I know that many of people don’t have their own budget and then cannot manage their finance. Everyone knows about how money comes in and goes out every month. If one tracks his/her budget and expenses, it will be much easier to track their spending habits. I just started posting my monthly expenses on my blog and have already found a few items to cut or reduce.
John Schmoll says
Thanks! Completely agreed, so much information is to be had when you start tracking your expenses and that’s half the battle of making a budget.
Remember to include such items as cigarettes. Don’t leave them off by telling your self that you will quit and not include them on your budget, not only will it show how much is absoulty wasted buy seeing $200.00 we waste it is a great incentive to stop smoking. Include it on the budget until you have quit for you know you are sure you put the habit down for good.
John Schmoll says
Most definitely Dan and good point – that can be a huge money suck.
Wish I would have learned this years ago.
Love your post. For me, a budget was mandatory. Problem was I could not find a process that worked for me. I tried several, Mint comes to mind right now and there were many others.
I was broke and digging a hole I didn’t have any idea how to stop digging. I was desperate. I tried everything I could find and nothing helped me. Then I found YNAB. It was a simple purchase when I found it but now it’s $5 per month. Guess I am a little dense as I could not do it with paper and pencil, or even a spreadsheet. YNAB was the “missing piece” for me.
Have been budgeting for almost two years now. Went from not knowing how I was going to pay my bills to saving a few thousand a month. Biggest change was not more income, to my surprise. It was simply making informed choices when making purchases. Things like: Do I really want this new pair of shoes (insert want) more than I want to go on a nice vacations (insert your own goal) this year? Those choices made all the difference.
Like you suggested, it is hard to share this wonderful tool. Budgeting is a hard subject to discuss. It has made such a difference in my life I want to shout it from the rooftops, but no one wants to hear it. Guess I will just sit here with my savings/investments growing nicely. Content and secure. What a wonderful feeling, for the first time in my life.
John Schmoll says
Glad to hear things are on the right path for you Teri! Informed choices are huge when it comes to managing your finances.
I feel like these steps should be taught to everyone from a young age. I wish they taught this to me when I was in high school! I try to track my expenses weekly and my savings too. I love seeing how much I actually saved in a month. Gives me a bit more motivation.
John Schmoll says
Completely agreed Amanda. I wish much, if not all, of them would be mandatory – would help a lot students get a basic foundation.
Jason Cabler says
Man, what a great comprehensive post! I believe doing a budget is the #1 thing you can do if you want to get your finances under control. Unfortunately, most people don’t do one. I like that you focused on setting and accomplishing goals with your budget. That helps make a huge difference when it comes to whether or not you actually stick with it.
John Schmoll says
Thanks Jason! Completely agreed, it comes down to goals. Once you have those in mind the rest of it can work itself out relatively simply.
Alexander Xochihua says
I’m pleased to see you post this topic, however, most people have heard of creating a budget- and we know the financial status of most people today.
People are overcome with credit card balances, auto loans that are far beyond what is practical for their income, student loans and other debts (medical, furniture loans).
I want to throw in a little hint at how to further improve things for people who cannot seem to find a way to save aggressively. Cut out these expenses until you prove to yourself that you can save according to your life & retirement goals:
Cut/Eliminate: Cable Bill, Entertainment, Charitable Giving, Gift/Holiday spending and Travel!!!
You are not honest with yourself if you have these expenses and are unable to save.
SAVE FIRST, THEN SPEND!
John Schmoll says
Those are all fair points Alexander (and completely agreed), however I do believe they’re covered here is this guide – not to mention ad nauseam on the site.