Creating a Monthly Budget

Piggy bank with various expenses such as savings and retirement written in different sections of its body

Peter Dazeley / Getty Images

Do you have a budget? Do you know where your money is going each month? Do you know where it went yesterday? Creating and following a budget is something many people find very difficult or tedious to do. Just thinking about the state of your finances can raise your anxiety level!

Making a budget and sticking to it is important to a strong financial future and can help you achieve your financial goals. In fact, creating a budget can reduce stress and improve your health because it allows you to take control of your life.

You can begin creating your budget in a word processing program or an Excel spreadsheet on your computer, although even a hand-written budget works, as long as you continually use it. You can also try online budgeting resources and apps like Mint or You Need a Budget.

Best Practices in Monthly Budgeting

Best practices are those methods that have, over time, been shown to work the best and be the most efficient. In terms of creating and maintaining an effective monthly budget, designing it upfront can help guide your spending.

Try using the 50/30/20 rule which says that you should devote 50 percent of your income to needs, such as rent or mortgage, food, car payment and gas, minimum payments on debt, and other things that are necessary for your health, safety, and survival.

Then put 30 percent toward wants, such as Netflix, a new handbag, movies, and the cost of upgrades such as choosing a BMW instead of a Toyota. The last 20 percent is saved in an emergency fund, an IRA, another investment account, or used to make extra payments on outstanding debt.

Once you have a budget framework, use the following ideas to help you get the most out of your budget:

  • Have defined goals for your budget (which helps to reach them faster) such as saving up for a home down payment or paying off a credit card.
  • Pay yourself first by moving money into savings.
  • Identify your needed expenses and overestimate them to build a small cushion.
  • Get the whole family involved by asking children to help clip coupons, and having teens pay for part of certain "wants" like a new phone.
  • Find an app or software that's easy to access quickly and straightforward to use.
  • Adjust your W-2 tax withholding so that you don't owe anything or get any money back either at tax time.
  • Track your actual spending each month and see how it compares to budget, then adjust your spending as needed.
  • Allow yourself a set amount of spending money each week.
  • Plan meals ahead and write a shopping list before you go to the store to avoid impulse buys.
  • Allow for treats occasionally! Everyone needs a break and this helps avoid becoming resentful about your budget.

Determine Your Income

To get started, you'll need to gather up the information to put into your budget, and figuring out your monthly income should be a relatively easy task. Many people are paid every two weeks, so your pay stubs or bank statements should tell you what you need to know. If you receive any other type of income on a monthly or less frequent basis, take note of it. Make sure to only account for your after-tax income. It makes little sense to include income in your budget that will be withheld by the government to cover taxes.

Don't forget irregular income, like bonuses or your pay from seasonal work. Calculate your irregular income by adding the total amount of income you receive in a year that is not your regular paychecks, and divide by 12 (12 months in the year). For example, if you are paid $3,000 once a year in June, divide $3,000 by 12 months to get an average additional income of $250 per month.

Gather Your Expenses

Gather all of your monthly bills. This includes everything that you pay on a monthly basis, such as mortgage or rent, credit cards, utilities, cable, Internet, etc. You will also need to gather bills that you pay less frequently than every month, such as auto insurance or car registration. Once you have all of your expenses together, you are ready for the next step. 

Since many of your expenses may fluctuate each month, such as credit card bills or utilities, you can review your checking account statements for the past three to six months to take an average and estimate expenses that vary from month to month. This also includes items like food, entertainment, and medical bills.

Creating Your Budget

Create a "Monthly Income" section in your document or software. Then, create the "Monthly Expenses" section of your budget below or next to the income section. Create a category for each type of expense you have each month. 

Remember to also create an "Irregular Expense" category, just like you did for your irregular monthly income. For example, if you have to pay $150 a year for car registration and $1,000 a year for auto insurance, you would have a category of Irregular Expenses for $95.83 per month ($1,150 divided by 12 months). For your irregular expenses, set aside that $95.83 into savings account so that you have the full amount when the time comes when you need to make the payment.

Subtract your total expenses each month from your total income each month from your budget table. Anything leftover can be put into savings or other categories. If you have a negative balance in your budget, you need to reduce your expenses (or increase your income).

Sample Budget Categories

Here's a list of expense categories to get you started:

  • Automobile
    • Gas
    • Repairs, oil changes, other maintenance
    • Registration fees and taxes
    • Auto loan payment
  • Bank Charges
  • Charity
  • Childcare
    • Babysitting
    • Child support
  • Clothing
  • Credit Card Fees
    • Annual, late, over-limit and other fees
    • Monthly payment
  • Education
    • Tuition
    • Books
    • School supplies
    • Field trips
    • Misc. fees
    • Student loan payment
  • Food
  • Gifts
  • Healthcare
    • Doctor visits
    • Eyeglasses
    • Prescriptions
    • Over the counter medication and supplements
  • Household
    • Rent / mortgage payment
    • Homeowner’s association dues
    • Furniture
    • Supplies
    • Home maintenance and repair
  • Insurance
    • Automobile
    • Homeowners or renters
    • Health
    • Life
    • Disability
    • Long term care
    • Roadside assistance
  • Job expenses
    • Reimbursed
    • Clothing
    • Professional dues
  • Leisure and Entertainment
    • Books, magazines
    • Movies, cable
    • Theater, sporting events
  • Hobbies
  • Pet Care
    • Food
    • Supplies
    • Veterinarian
  • Savings
  • Taxes
    • Income
    • Property
  • Utilities
    • Water, sewer, trash
    • Electricity
    • Gas
    • Cable and Internet
    • Telephone / Cell phone
  • Vacation

Sample Budget Schedule

Your budget may look something like this:

Regular Income $3,000
Irregular Income $250
Total Income $3,250
---------- ----------
Electricity/Gas $200
Cell Phone $100
Cable TV/Internet $150
Food $700
Credit Card Payments $200
Total Expenses $1,350