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How to make a monthly budget in 5 simple steps

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Shot of a mature man shopping in the cold produce section of a supermarket
AJ Watt/Getty Images
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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 more easily curb overspending.

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 take off some of 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 statistics:

  • On average, American households spent $61,334 in 2020. (Bureau of Labor Statistics)
  • Americans make five impulse purchases on average each month, totaling about $109 in costs. (SWNS)
  • 67 percent of Americans polled in May 2022 are concerned about their level of savings. (Deloitte)
  • 56 percent of all Americans reported delaying large purchases in June 2022 — the number is higher for lower income Americans at 63 percent. (Deloitte)
  • Housing, the largest expense, accounts for about 35 percent ($21,467) of the average household expenditure reported in 2020. (Bureau of Labor Statistics)
  • The cost of housing is increasing, too — home prices went up 7.6 percent from July 2021 to July 2022. (Redfin)

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

1. Calculate your monthly income

The first step when building a monthly budget is to determine how much money you make each month. This will set the limit for how much you can spend (and save) each month.

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 taxes and payroll deductions.

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 some apps that can help you track spending by linking to your bank account, or you could track it 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 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.

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 have an array of monthly subscriptions you rarely use.

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 out different line items that correspond to each spending category. 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 aren’t any strict rules when it comes to budgeting, though, as long as you spend money in a way that is 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 put away 20 percent of your income to savings, trying to save as much as possible is a good financial habit to get into.

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. For example, maybe you take on a new loan that you need to pay back, or you get a pay raise that gives you more flexibility with spending. Sit down every six months or at least 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.

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: There are several apps that can help to take care of some of the monotonous work of keeping up with a budget. Budgeting apps such as Mint and EveryDollar come with digital tools that can monitor your spending, track savings goals and even provide insight into where you can save on certain expenses.
  • Savings accounts: One of the most important line items of a budget is savings, and you’ll need a savings account to store those funds in. Two things to look out for in a savings account are the interest rate and monthly fees. The account may charge a fee if you don’t maintain a minimum balance, so be sure that the minimum deposit requirements are tenable for your financial situation.
  • Checking accounts: While a savings account is where you store funds for various savings goals or emergencies, a checking account is where money for daily spending is kept. You can track your spending by following the checking account’s transaction history. If you’re looking to open a new account, you may also be able to take advantage of an 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 improvements in your budget for how to save more.
  • Microsoft Office template: The budget template provided by Microsoft Office is a great 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 go up, 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 make. To help save on time and menial work, consider using a budgeting app or calculator to establish your budget.

Written by
René Bennett
Banking writer
René Bennett is a writer for Bankrate, reporting on banking products and personal finance.
Edited by
Managing editor
Reviewed by
Professor of finance, Creighton University