While few people would say they actually enjoy budgeting, that doesn’t make the task any less important. Making a budget helps you plan for expenses, and it can provide insight into your spending habits, allowing you to curb spending more easily.

The current high-inflation environment may have many people feeling especially strained when it comes to affording monthly expenses — and trying to save at the same time. While it won’t beat inflation altogether, establishing a budget will help you get by and lower the stress of covering upcoming expenses.

If you’re looking to build your first monthly budget, or want to revise one you already have, here are some tips.

Key takeaways

  • A budget is a tool that helps you manage your finances, from paying bills to building up your savings.
  • Having a budget helps you meet financial obligations as well as handle any unplanned expenses that come your way.
  • Budgeting can help you boost your emergency fund or save for goals such as a down payment on a home, a new car or your dream vacation.

What is a monthly budget?

A monthly budget is a plan for how you’ll spend your money each month. Monthly budgets are popular because many recurring expenses occur on a monthly basis, such as rent, utilities, credit card payments and other loan payments.

Ideally, your budget will involve spending less than you make each month, allowing you to save money. Also, when your expenses don’t exceed your earnings, you won’t need to tap into savings or borrow money to make ends meet.

A budget helps you 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 your spending, as you prioritize your spending on things that are important to you over what’s less important.

Why budgeting is important

Regular budgeting carries many tangible benefits, which often include:

  • Bills that are paid on time
  • More money in your online high-yield savings account
  • The means to cover unplanned expenses
  • Better ability to avoid overspending
  • Peace of mind from knowing your finances are in order

What’s more, checking in regularly with your finances helps ensure you’ll catch any bank errors or fraudulent transactions.

Key statistics on spending and savings

  • On average, American households spent $72,967 in 2022. (Bureau of Labor Statistics)
  • Housing, the largest expense, accounted for about 33 percent ($24,298) of the average household expenditure reported in 2022. (Bureau of Labor Statistics)
  • The cost of housing is increasing, too — the median existing home sales price went up 2.8 percent from September 2022 to September 2023. (National Association of Realtors)
  • Only 48 percent of U.S. adults say they have enough savings to cover at least three months of living expenses. (Bankrate)
  • More than half of Americans (57 percent) are uncomfortable with the amount of emergency savings they have. (Bankrate)
  • More than half of adults (53 percent) have delayed financial milestones because of economic conditions, while 53 percent have opted out of events or activities due to the economy. (Bankrate)

How to make a monthly budget: 5 steps

1. Calculate your monthly income

The first step is to determine how much money you earn each month. This will determine how much you can spend (and save) each month.

When calculating your monthly earnings, 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 items you no longer need.

Make sure you calculate your earnings using your net income, also known as your take-home pay. This is the money you have left over after taxes and payroll deductions.

2. Track your spending for a month or two

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. Various budgeting apps can help you track spending by linking to your bank account, or you could track spending manually by saving receipts and adding up expenses yourself.

As you track your spending, you may find that you spend more or less than you expected in 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.

3. Think about your financial priorities

Once you’ve spent time tracking your spending, it’s time to review your spending history and how it aligns with your financial priorities.

Everyone has expenses they can’t avoid, such as housing, food and transportation. However, if you aren’t keeping an eye on your spending, it’s easy to overspend on nonessential things. For example, you may find that you’re spending hundreds of dollars each month on takeout meals or have an array of monthly subscriptions you rarely use, from streaming services to gym and club memberships.

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. 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

To design a budget, list the line items that correspond to each spending category. It’s smart to pay yourself first, so be sure to include a line item for savings, whether it be for an emergency fund, a new car, a down payment on a home or other purposes. When it comes to savings advice, take the words of the Oracle of Omaha, investing guru Warren Buffett who said, “Do not save what is left after spending, but spend what is left after saving.”

Common expense categories in a budget include:

  • Rent or mortgage payment
  • Property taxes
  • Car payment
  • Gasoline
  • Food
  • Utilities
  • Childcare
  • Insurance premiums
  • Student loan payment
  • Medical bills
  • Tuition fees
  • Home and car maintenance
  • Gym membership
  • Entertainment and hobbies
  • Clothing and personal care
  • Travel

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.

50/30/20 rule: One popular rule of thumb for building a budget is the 50/30/20 budget rule, which 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 aren’t any strict rules when it comes to budgeting, though, as long as you spend in a way that’s satisfying and helps you reach your financial goals. The one truly important guideline is to spend less than you earn each month. Even if you can’t save 20 percent of your income, get into the habit of saving as much as possible.

5. Track your spending and refine your budget as needed

A budget is a living document that can be changed over time, as needed. Once you’ve built your budget, you should continue to track your spending and follow your spending plan.

As time passes, your priorities and life circumstances may change. For example, you take on a new loan or you receive a pay raise. Review your budget periodically to see if it needs revising based on any such changes.

Monthly budget example

Using the steps outlined above, let’s consider how someone might make a budget for a net income of $4,000 a month. Remember that net income is the money you have for a budget after subtracting taxes and deductions. The net income can include earnings from a full-time job as well as any passive income or side gigs.

It might be helpful to organize each line item by priority. The first priority in this budget is savings, which is followed by needs or essentials, and then by wants or nonessentials.

After making the budget, you’ll want to track your spending to see how actual expenses line up with predicted expenses. Then, adjust the budget accordingly to make up for any differences.

Category Line item Amount per month
Savings Emergency fund $300
Vacation fund $200
Retirement $200
Total $700
Needs Rent $1,200
Transportation $400
Electricity $60
Gas/oil $30
Phone $60
Internet $40
Groceries $270
Personal care/hygiene $40
Credit card $100
Total $2,200
Wants Streaming subscriptions $70
Dining out/ food delivery $250
Apparel $100
Nightlife $100
Movies/theater $50
Gifts $100
Miscellaneous spending $430
Total $1,100
Total for all categories $4,000

Budgeting resources

  • Budget apps: These can help with some of the monotonous work associated with budgeting. Budgeting apps such as Mint and EveryDollar come with digital tools that can monitor your spending, track savings goals and provide insight into where you can save on certain expenses.
  • Savings accounts: One of the most important line items of a budget is savings, so a savings account is a must. Find an account that earns a competitive annual percentage yield (APY) and that either doesn’t charge a service fee or makes this fee easy to avoid.
  • Checking accounts: While money in a savings account is for various savings goals or emergencies, a checking account is where money for daily spending is kept. If you’re looking to open a new account, you may also be able to take advantage of a bank account bonus.
  • Budget calculator: Bankrate’s home budget calculator does the work of figuring out what your net income is after you account for each expense category. It also suggests ways you can save more money.
  • Microsoft Office template: This budget template is an option for those who prefer manually making a budget over digital services, and it’s free with Microsoft 365. It outlines the various spending categories for a single household — you just fill in the cells with each expense amount.

Bottom line

As prices continue to rise, the importance of tracking where your money goes rings truer than ever. Making a budget is an effective way to keep up with your spending, gain a better understanding of your financial habits and incentivize saving.

Before creating a monthly budget, track your spending for a month, noting necessary expenses, unnecessary expenses and where there’s room for savings. You’ll calculate your expenses against your available income, with the goal of spending less than you earn. To help save on time and menial work, consider using a budgeting app or calculator to establish your budget.

Bankrate’s René Bennett and writer TJ Porter contributed to earlier versions of this story.