Financial Planning

Destroy the idea that you’re not good at keeping a budget. Whether you haven’t successfully created a monthly budget in the past, or you’ve created one and abandoned it somewhere along the way, you can create a monthly budget. Not only can you create a monthly budget, you can also manage it over time and use it to make progress on your financial goals. In the coming weeks, use this guide to help you create a monthly budget—one that helps you stay on top of your money to help you live the life you want.

How to create a monthly budget (and do it right this time!)

A monthly budget is a plan you create to help you manage your money so you can live your life. It’s a living, breathing set of documents or tools that you use every day to help you manage your money and contribute to your overall financial progress.

A monthly budget typically consists of three components:

  1. What money is coming in: This includes your income, any refunds, or other expected income.
  2. What money is going out: This includes all of your expenses like bills, groceries, your son’s new school uniform, your daughter’s new science kit, that $10 you allowed yourself to spend on lottery tickets, everything.
  3. How you contribute toward your financial goals: How much money did you pay toward your debt, contribute to your savings, or put away for retirement this month? However you are tracking your financial goals, your monthly budget should show its part in the story.

As you work through this process, remember that tracking your finances is one of the easiest ways to take back control and to help you achieve your goals. There are several different ways to track and budget your money, but you know yourself and your finances the best. A successful monthly budget is simply the one that works for you—not just for the good months, but for every financial challenge that comes your way. So, let’s get started.

The four steps to creating a monthly budget are:

  1. Understanding your income
  2. Understanding your expenses and categorizing spending
  3. Including your financial goals, if not already listed
  4. Balancing your monthly budget (so you’re spending less than you’re earning)

Download your free monthly budget template here!

1. Understand your income

The first step to creating a monthly budget is to know the money you’re earning each month. Consider everything that is coming into your bank account like your paystubs, any revenue from a side business, bonuses or refunds you expect, even credit card cashback. The total is your net income, and it’s the number you’ll use to balance your budget compared to your expenses.

For anyone with irregular paychecks or hourly wages: Planning your monthly income is going to be harder to predict for you. You could potentially plan your monthly income in a few ways:

  • Average out your annual income by month and adjust it once you get paid
  • Make a very conservative estimate of how much you expect to earn, then add any additional income mid-month
  • If you work in a seasonal industry, average out each month’s income over the last several years and use those averages as predictions

2. Understand your expenses

Next, list out everything you spend your money on in a month. You can average out your expenses from the last 3 months, or start fresh and track your household expenses in the next 30 days.

Start with the essentials. List out your committed expenses and the things you need to spend money on, including:

  • Mortgage or rent bills
  • Car payments and insurance
  • Student loans, personal loans, and credit card payments
  • Transportation costs like gas, bus and train fares
  • Utilities like water, gas, electricity, and cable
  • Groceries and household items
  • Savings goals and retirement contributions
  • Any mandatory expenses for your child like tuition or childcare

Now list out your secondary expenses. Write down all of the items, experiences, and services you like to spend money on, but may not need to:

  • Sports, musical equipment or toys for your child
  • Pet care, beyond the essentials
  • Dining and takeout
  • Home décor, clothing you don’t need, car accessories
  • Entertainment including streaming services, movies, books, DIY or craft projects

If overspending is a sore spot for you, it can be tempting to flub some of the numbers here, but we urge you to be honest with yourself. You can make your money work harder for you once you know where it’s going.

Factor in anything you’re missing. Even if your car didn’t need maintenance or your Prime membership didn’t renew this month, make sure you list out your yearly irregular expenses. Irregular expenses to consider when creating your monthly budget can include:

  • Car maintenance
  • Subscriptions, insurance plans, or services that renew quarterly, biyearly, or yearly
  • Membership dues
  • Your child’s extracurricular expenses, like fundraising, equipment or fees
  • Annual fees on credit cards

Once you have a clear view of how much you’re spending, add all of your monthly expenses up. This number is going to be the amount you’ll compare against your income to make sure you’re spending less than you’re earning (If your expenses are more than your net income right now, do not freak out. They next step will help you figure out how to balance your monthly budget.).

Categorize your monthly expenses

Spending categories help you organize your monthly budget so you’re not listing every single transaction in your monthly budget. Your specific expense categories can be as general or as granular as you need them to be to keep track.

Set Spending Amounts for Each Category

Now, add up your actual spending in each of your categories for your finances. This number is going to help you assign realistic spending amounts for each category. You may want to set hard limits on certain spending categories like fixed expenses, but others may work better with a maximum amount, like an electric bill.

From the experts at Mint:

Using the Mint app, you can connect your accounts so you can track your actual spending against the budget you created for yourself.  Keep the 50/20/30 rule of budget in mind as you do so!  This rule of thumb for allocating your net income every month (50 percent for fixed expenses, 20 percent for savings and 30 percent for fun/variable expenses) allows you to use this benchmark as a starting point to see how your budget breaks down. While this is just a starting guide, it does help you sort through your fixed, saving, and variable spending to determine what will work for you. Even if you cannot save the full 20 percent of your net income, you can at least use it as a goal and start by saving even 1 percent toward the goals you will set up for yourself.

Learn More:

3. Build your financial goals into your monthly budget

The last component of your budget is to make sure you’re contributing to your financial goals. The point here is to create a monthly budget that helps you work toward your long-term priorities each month. Can’t ever get around to saving? Is debt slowly taking up all of your money? Now is the time to reset and commit a portion of your income to your goals.

If you don’t have financial goals set in stone or your current goals aren’t really your true priorities, take a moment to list them out. You may need to adjust them after you’ve created your monthly budget (and vice versa) to have a realistic plan in place.

Read More: How to Set Up Financial Goals for Success

4. Balance your monthly budget

Consider your budget like a scale: your income on one end and your expenses on another. Your general goal is to make your income outweigh your expenses.

Where do you currently fall on the scale? Does your income currently outweigh the spending amounts you’ve created?

If your expenses are less than your income…

This is good. It means you are spending less money than what you’re earning. While you’re not making tough choices between your bills and your kid’s music lessons, you may be able to cut down on expenses to accelerate your financial goals. Consider your lower priority categories like entertainment. Are there expenses you could reduce each month to help you reach your goals faster?

If your expenses are more than your income…

Start trying to cut expenses. This is your first line of defense when you’re spending more than you’re earning (It’s easier to cut expenses than to try to increase your income).

Spoiler: This is hard. You may have to make some tough decisions here, but don’t get discouraged. You should allow yourself a few days to evaluate your spending amounts and come to terms with where you are, instead of making quick and harsh decisions you may not be happy with later.

You might not be able to cut down your expenses overnight either. A budget can and should be revisited often. Adjust, and re-adjust, and re-adjust again when things change.

As long as you can still see a path toward achieving your financial goals, you’re doing something right.

Decide how to create and track your monthly budget

Selecting a monthly budgeting tool is about trial and error.

Some people like to write down every transaction and track things manually, while others prefer a hands-off approach where a computer program or app tracks your spending automatically. The best monthly budgeting tool is the one that works for you. Here are a few ideas and recommendations to get started.

Best tools for managing your budget

When you’re ready to start budgeting, consider trying these tools to stay on track:

Mint or other budgeting apps: Mint is one of the most popular free budgeting tools around. Connect to your bank, credit card, and other financial accounts, automatically categorize your expenses, and watch your progress over time.

From the experts at Mint:

The Mint app allows you to take a deep dive into all your monthly expenses to see if there are any you can cut out. Perhaps memberships or subscriptions you no longer use? With any freed up cash you create by eliminating or reducing expenses, you can decide what financial goal you want to save that for. Mint has a great feature to help you create financial goals and set up automatic savings toward them so you see your progress.

Learn More: Download: Mint for iOS or Android

Spreadsheets: If you’re comfortable using tools like Google Sheets or Microsoft Excel, you can create uber-customizable monthly budgets. Be sure to take advantage of the formulas that can make tracking your budget in a spreadsheet even easier.

Psst! Click here to download your free monthly budget template.

Worksheets: You may be able to find a monthly budget template you like better with a quick internet search for blogs and booksellers. A lot of publishers allow you to download or copy those templates and make them into your own.

Paper and pen: There’s nothing wrong with budgeting with a pad of paper, a calculator, and a pen. If it helps you wrap your head around your money, it’s the right monthly budget method for you.

Read More: 5 Apps that Can Help You Create A Monthly Budget and Stick to It

We Polled the Best Egg Team and These Are 7 of the Best Financial Apps

Common Blockers to Creating a Monthly Budget & How to Cope with Them

The biggest reason why budgets fail? You create a budget, and then life throws something at you that doesn’t fit nicely into it.

Most monthly budgets were created for some other version of you where everything goes right and nothing is expensive. Here are a few of the ways that budgets often go wrong and how you can recover from them, so you can stick to your new monthly budget.

Unexpected expenses ruin your budget

Even when you build in spending for irregular expenses like a biyearly bill or quarterly tax, unexpected expenses you didn’t plan for, happen. Many people abandon their monthly budget at this point, but we’re here to tell you, do not give up on it!

If your budget isn’t 100% reflective of what your life looked like last month, that’s okay.

For folks that have the cash, when unexpected expenses pop up, consider using your emergency fund. For folks who don’t have the emergency fund yet, take the time to re-adjust your budget. You may have to make a hard choice this month to stay on track with your most important financial priorities, but it is better to understand the damage so you can plan for next time.

For irregular, but expected expenses like annual fees or membership dues, consider saving a small amount each month to pay for the full expense when the bill comes around.

Read More: How to Stop Living Paycheck to Paycheck

Be the butterfly, not the werewolf.

Once you assess your finances, you may be hit with a certain picture of your finances. Perhaps it’s exactly as you expected, or perhaps there are expenses that shock you.

Budgets often fail because we want to cut down all of our extra expenses overnight. You think, “I’m going to spend $200 on groceries this month, even though every month for the last year I’ve spent $500.”

For some folks, major lifestyle changes are simple. But unless you’re in dire straits, making these major lifestyle changes might be hard to commit to.

If you want to make lifestyle changes based on what you’ve found in this exercise, great! Instead of changing everything about your life overnight, start small and slow as you work toward balancing your budget.

Ex: Instead of cutting down your grocery budget by $200, try to cut it down by $50 each month until you reach your goal.

My life is chaos, I can’t fit it into neat budget categories

In times of change and in times when you’re feeling out of control, your monthly budget is not a burden. It’s your north star. If your income and expenses are changing unpredictably month over month, you might not be able to stick to tight budget categories. Instead, consider creating loose guardrails. Setting maximum limits can help you keep track of things in the day-to-day.

As a larger financial goal, we recommend creating an emergency fund you can dip into for any unexpected expenses that come up.

Read More: How Much Money Should You Save Monthly

There simply is not enough money to keep a good budget.

Living within your means is easier when you clearly have enough means to live. If you are someone who has too many bills and expenses for the income you currently have, consider taking steps to reduce your expenses and increase your income.

Your budget might not be balanced no matter how much you try to will it. Your expenses may still outweigh your income, but keep track anyway.

A successful monthly budget for you is going to be one squarely focused on your most important priorities while you look into ways to reduce expenses.

Read More: Ways to Manage Your Debt

From the experts at Mint:

Talk money with your honey.

Money and budgeting can be a trigger of conflict in many people’s romantic relationships. And understandably, as most still do not grow up learning about money in school or in their households.  Learning how to communicate about a topic you are not really confident in is difficult for many. But it doesn’t have to be. With the right intention and awareness, you can begin to talk about budgeting with your romantic partner and build a partnership together that enhances your financial life for the better.

Loss of income

Having a cash flow plan is crucial when you’re experiencing a sudden loss of income. Start by figuring out how much you need to cover your monthly expenses — make a list of all your expenses and cut any that you can live without. Then, call your service providers (e.g. TV subscriptions, cell phone company, etc.) and lenders to see what sort of options you have to reduce, defer or cancel your services or payments for the interim. It’s also worth double checking any membership payments, such as gyms, which may be closed due to COVID-19, as these payments should be paused during this time. Beyond that, you want to protect your credit for the future, so try to keep credit expenses low, and pay your minimum debt payments so you don’t default.

“Forgetting” about your budget.

Get in the habit of reviewing your budget at least every month, if not every week, to ensure your spending and savings goals stay on track. That way, you can course correct as the months go by and learn how to deal with the obstacles that life will inevitably throw your way.

Read More: Managing A Budget — Tips to Help You Stick to a Monthly Budget

What to Do If Your Partner Has Debt

The 1 final thing you need to know to create a monthly budget

If you’ve made it this far, congratulations! Creating a monthly budget is hard and it certainly isn’t what you want to do with any of the free time you have in your day.

Which brings us to the final thing you need to know about creating a monthly budget: Just Try.

Monthly budgets are flexible plans to help you on your way. But life rarely goes as planned, so do not get discouraged when your budget isn’t perfect. The goal is to put yourself in the best position you can to live the life you want to live.

When a spending category isn’t exactly right, or your car breaks down, or you splurge on a weekend, or your kid needs a new pair of shoes, or whatever imperfect chaos comes your way, a monthly budget is going to help you navigate it and be better in the future.

Click here to download our free monthly budget templates.


March 07, 2023


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