While few people would say they actually enjoy budgeting, that doesn’t make the task any less important. Knowing how much money you make and having a plan for where and how to spend it is important if you want to make sure you cover essential expenses and have money left to save at the end of every month.
If you’re looking to build your first monthly budget, or want to revise one you already have, here are some tips.
What is a monthly budget?
A monthly budget is a plan for how you will spend your money each month. Monthly budgets are popular because many recurring expenses, like rent, utilities, credit card payments and other loan payments occur on a monthly basis.
Ideally, your budget will involve spending less than you make each month, leaving you with money to save. Budgeting for more than you earn in a month means spending savings or borrowing money to make ends meet.
A budget should make it easier to plan for expenses before they happen, rather than hoping you have enough money to cover essential costs or emergencies. Budgets can also make you more mindful of how you spend money, making it easier to prioritize spending on the things that are important to you while reducing spending on things that aren’t as important.
How to make a monthly budget: 5 steps
If you’re making a monthly budget, here are some key steps you should follow.
1. Calculate your monthly income
The first step when building a monthly budget is to determine how much money you make each month. It’s important to make sure the budget you build doesn’t involve spending more money than you make, as that will mean going into debt in the long term.
When calculating your monthly income, look at consistent sources of income. You should include your paycheck from your day job, but should probably exclude less consistent sources of money, such as selling old stuff you no longer need.
Make sure you calculate your income using your net income, also known as your “take-home pay.” This is the money you have left over after payroll deductions. Net income is the money you earn that you can actually pay bills, spend on necessities, save and more.
2. Spend a month or two tracking your spending
One of the best ways to get a sense of how much you should budget for is to track your actual spending over the course of a few months. There are plenty of apps you can use to track and categorize your spending, but you can also save receipts and add everything up on your own if you prefer to do that.
If you don’t want to manually track your spending, you can sign up for Bankrate’s myMoney to categorize your spending transactions, identify ways to cut back and improve your financial health.
As you track your spending, you may find that you spend more or less than you expect on different categories. This is important because it is a good lead-in to the next step in the process.
Don’t forget to budget for expenses that may occur annually instead of monthly. You should account for expenditures such as property taxes, car insurance payments, doctor or veterinary visits and vacation costs. You may also want to include a factor for unplanned expenditures such as car repairs or home repairs.
3. Think about your financial priorities
Once you’ve spent time tracking your spending, it’s time to sit down and look at your spending history and how it aligns with your financial priorities.
Everyone has expenses they can’t avoid, such as rent, food and bills. However, if you aren’t putting in the effort to keep an eye on your spending, it’s easy to spend far more than you expect on nonessential things. For example, you may find that you’re spending hundreds of dollars each month on takeout or spending too much money shopping online.
Building a budget isn’t about limiting yourself to only spending money on essentials. Instead, it’s about allocating your money in the way that makes sense for you. Think about your financial priorities and goals, as well as what makes you happy. Once you see how much you’re spending on certain things, you might want to try adjusting your spending habits to increase your savings or put more money toward fulfilling hobbies or activities.
4. Design your budget
Once you’ve taken the time to think about your priorities and how they align with your spending habits, you can sit down and plan your future spending.
It’s smart to pay yourself first. One of the first things you should put in your budget is savings, whether it be for an emergency fund, a new car, a down payment on a home or other purposes. Follow the advice of investment icon Warren Buffett, who said: “Do not save what is left after spending, but spend what is left after saving.”
Next, look at your spending habits and see how they line up with your priorities. If your actual spending is already aligned with your goals, you can use your spending history as a guide for your budget. If you want to completely overhaul your spending habits, you’ll want to build your budget from the ground up instead.
One popular rule of thumb for building a budget is the 50/30/20 budget rule. The rule states that you should allocate 50 percent of your income toward needs, 30 percent toward wants and 20 percent for savings. How you allocate spending within these categories is up to you.
There are very few strict rules when it comes to budgeting so long as you wind up spending money in a way that makes you happy and helps you reach your financial goals. The only truly important rule is that you budget to spend less than you earn each month. Spending more than you make will lead to debt in the long term and prevent you from achieving financial security.
5. Track your spending and refine your budget as needed
Budgets are a living document. They aren’t set in stone. Once you’ve built your budget, you should continue tracking your spending and working to follow your spending plan.
However, as time passes, you may find that your priorities and life circumstances change or that your spending habits don’t line up with the spending habits you’ve planned for. Sit down every six months or once every year to look at your budget and see how well you’re sticking to it. You can revise your budget to account for changes in your spending habits and income.