How to make a monthly budget in 5 simple steps

A budget is a tool for planning your expenses and gaining insight into your spending habits, and it can help you to spend less and save more. Making a budget typically involves listing out your income and expenses while considering your savings goals.

You can create a monthly budget by calculating your monthly income, tracking your spending, thinking about financial priorities, designing your budget and continuing to track your spending.

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 are due on a monthly basis, such as rent, utilities, credit card payments and other loan payments.

Ideally, the budget you create 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.

How to create a monthly budget

1. Calculate your monthly income

First, determine how much money you earn after taxes. For many, this is a matter of looking at your direct deposit amount in each paycheck. Then, multiply this by the number of paychecks you receive each month. 

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.

The following formula can be used to calculate net income:

Gross income – taxes, retirement contributions (such as 401(k) or pension), insurance premiums = take-home pay

If you also have a steady side hustle, you could include this pay in your monthly income, although it may be best to exclude less consistent sources of money, such as occasionally selling items you no longer need.

2. Track your spending for three months

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. Some banks’ apps and websites automatically categorize purchases, such as “Groceries” and “Entertainment.” Alternatively, you can categorize your spending using a budgeting app or by saving receipts and adding up totals 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’s 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, insurance premiums, car registration, annual memberships or subscriptions. 

Other expenses that may not occur on a predictable basis but should be accounted for include:

• Doctor visits, dental visits and other medical expenses
• Holiday spending
• Gifts for birthdays, anniversaries and other occasions
• Attending a wedding or special event
• Travel
• Home and car maintenance
• Medical expenses for your pets

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, retirement goals, a new car, a down payment on a home or other purposes. When it comes to savings advice, take the words of 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 and car maintenance
• Gasoline and other transportation costs (parking, tolls, public transportation)
• Food
• Utilities
• Phone and internet
• Childcare
• Insurance premiums
• Debt repayment (credit cards, student loans, other loans)
• Medical bills
• Tuition fees
• Home maintenance
• Gym membership and other subscriptions
• Entertainment and hobbies
• Clothing and personal care
• Travel and gifts
• Household supplies
• Pet supplies and pet medical expenses

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.

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.

Common budgeting methods

There are several popular budgeting techniques or strategies to choose from. Familiarizing yourself with the options can help you better identify an approach that works best for your lifestyle and needs. The most common budget approaches include:

50/30/20 rule: The 50/30/20 budget rule calls for dividing your after-tax income into three separate categories: 50 percent for needs, 30 percent for wants and 20 percent for savings. This may be a good option if you prefer a very structured budgeting approach, and it helps ensure a set amount of your income is saved every month.

Zero-based budgeting: The idea behind a zero-based budget is that every dollar of your take-home pay is assigned a purpose. The result is that your monthly income minus your monthly expenses equals zero. This is not to say you should spend every dollar, but rather that you know where every dollar of your monthly income is going.

Pay-yourself-first: As the name implies, the pay-yourself-first budgeting strategy focuses on depositing money into savings for yourself first, before paying any bills or buying anything. Next, you pay your bills. And finally, the money that remains can be allocated to your wants or entertainment.

Envelope budget: The envelope approach can be a good option if you prefer paying for expenses with cash (though there are digitized versions of this method). Also known as cash stuffing, this approach involves creating an envelope for each expense category in your budget. Use your pay to fill each envelope with the amount of money you have designated for that category or expense. Once you’ve used all the money in a particular envelope, you stop spending on that category or expense. 

If your envelope budgeting involves keeping your funds in cash, keep in mind that it is lacking the protections that come with a Federal Deposit Insurance Corp. (FDIC)-insured bank account (such as theft or a natural disaster). Also, you lack the opportunity to earn interest, as you could with a high-yield checking account or high-yield savings account.

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, follow your spending plan, and make any adjustments to your budget.

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 to be revised.

Monthly budget example

Using the steps outlined above, let’s consider how someone might make a budget for a net household income of $6,477 per month. This is the median monthly household income, according to the most recent data from the U.S. Census Bureau. 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.

You may find it helpful to categorize your budget’s line items. In the example below, each line item falls under a bucket of “Savings”, “Needs” or “Wants”.

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.

Why budgeting is important

Regular budgeting carries many tangible benefits, which often include:

• Bills that are paid on time, which not only avoids late fees but can help your credit score
• More money in your savings account
• The means to cover unplanned expenses
• Better ability to avoid overspending and accruing debt
• Peace of mind from knowing your finances are in order and increased awareness of where your money is going

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

Budgeting resources

• Budget apps: These can help with some of the monotonous work associated with budgeting. Budgeting apps such as 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 at an FDIC-insured bank 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.

Bottom line

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 few months, 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.