Skip to content

    When you’re working on getting your finances in order, creating a monthly budget is one of the most fundamental steps you can take. However, if you’re newer to money management, this process can feel intimidating.

    In light of that, we’ve created a step-by-step guide on how to create a budget below.

    Learn how to create a monthly budget that works for you

    1. Spend time tracking your expenses.

    Although it may seem strange, creating a budget does not begin with sitting down and writing out what you want to spend each month. Truthfully, doing so can lead you to make a budget that is unrealistic and does not match up with your current spending habits.

    Instead, it’s a better idea to track your spending habits for a set amount of time before you put anything on paper. You don’t have to do it for long. A month or two should be plenty of time to get a sense of how much you are traditionally spending and where your money is going.

    As for how to track your spending, while it is possible to keep track of your expenses via a spreadsheet or a piece of paper and pen, it may be easiest to use an app. These days, there are plenty of apps that will hook up to your debit or credit card and track your spending for you.

    2. Add and categorize your spending.

    Once you’ve tracked your spending for a decent amount of time, the next step in creating your monthly budget is to categorize your spending. Put simply, when you categorize your spending, you’re really breaking your expenses up into a few distinct categories. If you need some inspiration to help you categorize your expenses, consider the following:

    • Recurring monthly expenses: These are the expenses that you need to pay each month. They might include your housing payment, car payment, utilities, and any other loans.
    • Financial account contributions: After all your recurring expenses are paid, add up how much you would like to contribute to your financial accounts like your savings accounts and retirement accounts.
    • Discretionary spending: Finally, add up how much you spend on non-recurring expenses throughout the month. These could be expenses like restaurant and bar tabs, gifts for events and special occasions, or online shopping purchases.

    Finally, add the individual expenses in each category together so that you have a total for each one.

    3. Allocate your income.

    After you’ve categorized your expenses for your monthly budget, you need to evaluate how well your spending matches up to your income. First, start by adding up all of your monthly take-home pay. In this case, you should focus on only the income that comes in regularly. Irregular income like bonuses or unusual overtime hours can not be counted on to happen regularly so they should not be included in your budget.

    Once you have a number for your monthly income, subtract your total from each spending category from it. Start with your non-negotiable, recurring monthly expenses. Then, subtract your financial account contributions. At that point, ideally, the number you have leftover will closely match your total for discretionary spending. However, if it’s much higher, you may want to work on cutting back on how much you spend on nonessential items each month.

    4. Try out your monthly budget and make adjustments.

    If you’ve followed all of the steps above and put the totals on paper, you have a monthly budget. That said, a having a monthly budget on paper doesn’t mean much if it doesn’t match what you’re actually spending. With that in mind, continue to track your expenses for a few more months and see how close you can get to having your actual expenses match the totals given for each of your expense categories.

    In the end, it’s okay if they don’t match up perfectly right away. When that happens, you just need to make some small adjustments. For example, you could make an effort to cut back on your non-essential spending, or less ideally, you can contribute less money to your accounts. In either case, the key is that you want to keep making adjustments to your budget until you have one that closely matches your actual spending habits.

    Allow your monthly budget to guide your spending habits

    Lastly, after you’ve created a budget that works for you, you’ll want to allow it to guide your spending habits, at least to a certain extent. For example, if you see that you’re getting close to your discretionary spending limit, you might put yourself on a temporary spending freeze. Alternatively, if your utility bills are taking up too large of a chunk of your recurring expenses, you might decide to cut back on your usage.

    Your mortgage options for a smooth journey home.

    Get expert guidance and personalized solutions for a stress-free mortgage experience.