How to make a monthly budget

By Michelle Schroeder-Gardner  5 minute read

By Michelle Schroeder-Gardner

5 minute read

Everyone should have a plan for how best to allocate their monthly income. But, according to a Gallup survey, around 68% of households in the U.S. don’t prepare a budget. There's a negative association with the word budget, and, to be honest, that makes sense. Spreadsheets and numbers can be intimidating and it’s sometimes difficult to look honestly at how you’re really spending your money.

But there’s no reason to be scared of making a financial plan. Budgets aren't meant to hold you back—they are here to give you freedom! Budgets help you reach your goals, pay off your debt, save for retirement, or go on your next dream vacation. To put it simply, budgets help you take control of your life.

So, let’s make a budget:

First, get your income straight.

The income part of your budget is easy to skip. Many of us think we already know our income, so we don't feel the need to spend more time figuring it out.

However, so many people get their income wrong. They either forget how high their taxes actually are or forget to factor in their monthly expenses (such as health insurance and other benefits which may be deducted from their paychecks).

So the first principle of beginning a budget is to figure out how much money you actually deposit in your bank account each month. That’s what you have to play with.

Next, look at what you’re spending.

Make a list of everything that costs you money. You want this list to be as realistic and comprehensive as possible.

Now, estimates do not matter—you need the actual numbers! The average person greatly underestimates how much money they are actually spending. All of the little expenses add up quickly. Five dollars here and there may not seem like much, but a lot of little expenses can add up to hundreds of dollars a month if you’re not careful.

How do you learn where your money is going? The fastest way is to collect all of your receipts as well as your credit card and bank statements from the last month.

If you don't have all those receipts, then I recommend using your next month as a fresh month, and tracking literally everything that you spend money on—whether it's $1 or $100+. (That means recording every single transaction with a note that tells you exactly what you bought. No cheating!)

At the end of the month, you can take a hard look at what you’re spending. Identify patterns. Do you have any regrets? Were there any impulse buys which could have been avoided? Which expenditures are necessary and which can be reduced or eliminated?

Decide how much you need to save and invest.

Before you figure out how much money to spend on various living expenses, you need to determine how much you should be saving and investing each month.

If you don’t have any idea how much you should be saving or investing you’re not alone. Luckily, here are some tools to help:

  • Retirement Calculator (NerdWallet) - Enter a few pieces of information to learn how much you should be saving in order to meet your goals.

  • The Ultimate Guide to Retirement (CNN) - This resource contains just about everything you need to know to start tackling your financial plans. Don’t get overwhelmed—just take it one step at a time! If you need a good place to start, try the article “How much should I save?”

  • A financial advisor - Sometimes you need to call on the professionals. A good financial advisor is worth the expense because they will improve your financial situation over the long haul. Consider hiring someone if you’re seriously confused!

Plan your spending for each expense category.

When you’ve determined your actual income and have subtracted the amount which will go to your savings, you’ll have a monthly amount left for living expenses. It’s time to plan how much you’ll spend on each category! Here’s a partial list of categories:

  1. Home - This category includes your house or rent payment, as well as money for maintenance, insurance, property taxes, etc.

  2. Transportation - This includes all car expenses. Think your monthly car payment, car insurance, fuel, repairs/maintenance, registration, and so on.

  3. Food - Anything that is food related! Keep in mind that if you want to eat out a lot you’ll need to make sure you assign enough money to this category. (You can also separate this category into two - groceries and restaurant spending.)

  4. Communication and utilities - This category includes all your communication utilities (such as cell phone service, internet, cable bill) as well as household utilities, like your electric, gas, and water bills.

  5. Consumer debt and education loans - If you have credit card debt or student loans you’re paying off, you need to make sure you allow for that in your budget.

  6. Health care - Even if you have health insurance, you may need to set aside money for co-pays, medical equipment, and prescriptions. You can also include massages and other supplementary health care in this category.

  7. Personal items and personal care -This category is for clothes, shoes, haircuts, makeup, salon visits. etc.—everything you buy to keep yourself clothed and looking good.

  8. Entertainment - You’ll want to set aside money to enjoy life. This category includes all spending for outings, evenings with friends, and dates, as well as money for daily entertainment like movie tickets or a Netflix subscription.

  9. Travel (and savings for travel) - One of my favorites! If you set aside money every month, you might be surprised at how fast you’ll be able to take the trip you’ve been wanting to take for years.

Finally, set up a system.

Have you decided how much you can spend in each category? You’re almost done! Now you’ll need to set up your budget in a way that makes it easy to track. There’s no reason to be afraid of this step—technology has made monitoring your budget very simple.

Here are a few options for organization:

  • A spreadsheet - A tried-and-true method and it’s free! Setting up a budget in a spreadsheet can take more time in the beginning, but that’s not necessarily a bad thing. After spending so much time with your spreadsheet, you’ll understand your budget better and will hopefully be more motivated to stick to it. (Here’s a quick tutorial on how to set up a budget spreadsheet in Excel. You can also use Google Sheets.)

  • You Need a Budget - This is a very popular option! If you don’t feel like figuring out a spreadsheet, You Need a Budget is a great budget app that makes organizing your finances very simple. It’s not free, but it does offer a free trial (and feeling financially secure is priceless).

  • Mint - Another well-regarded budgeting app. This app connects to your bank and credit card accounts to help you track spending and stick to your limits each month. And it’s free!

  • Pocketguard - Once you get this free budget app set up, it will automatically tell you how much free-and-clear spending money you have left for the month. Not bad for a tap!

Congratulations! You’ve set up a budget.

Now that you’ve done all the hard work, I recommend that you analyze your budget on a regular basis—once a week, once a month, or whatever else feels right for you. They key is to just make it a recurring task. If something isn’t working, change it! A budget is a living document and you can tweak it as you go along.

How do you keep track of your finances?