Learning how to budget money allows you to take control of your finances and save for unexpected events. But first, you need to figure out your monthly income and list all your expenses so you can categorize everything appropriately.
Creating a monthly budget is easier than you might think. Read on to learn how to make a budget and work toward financial goals like building an emergency fund, paying down debt, or investing in lucrative opportunities.
What is a Monthly Budget?
When you budget monthly, you’ll have a financial plan that allows you to manage your income and expenses. You can use your budget to allocate specific amounts to various categories.
Ultimately, a monthly budget serves as a roadmap to guide your spending so you can achieve financial goals without overspending. A monthly budget is essential if you want to take control of your finances and make smart decisions with your money. Budgets help you prioritize your needs vs. wants so you can work towards long-term financial stability.
Major benefits of a well-thought-out budget include:
- Understanding your finances
- Gaining the ability to prioritize expenses
- Having a concrete plan for saving for future goals
- Identifying potential issues in spending habits
Step-by-Step Monthly Budget
Creating your budget monthly will help you organize your finances. Follow the 7 steps below to create a fool-proof budget. Each focuses on a specific aspect of budgeting so you can create a spending plan tailored to your specific and unique financial situation.
Step 1. Determine your monthly income
Determining your monthly income is the first step in creating a budget for monthly expenses. This serves as the foundation for all your spending decisions and your saving plan. It’s important to be realistic about your income.
Your primary source of income will be from your employment, but you should also include money acquired from things like:
- Rental property earnings
- Investment dividends
- Interest
- Pensions
- Social Security benefits
- Alimony or child support payments
- Freelance work or side gigs (as long as they’re consistent)
It’s important not to include unreliable or inconsistent sources of money – like lottery winnings or gifts. Be realistic about your monthly income estimation so you can plan how to pay for fixed expenses and save.
Step 2: List all your monthly expenses
The next step to making a monthly budget is listing all your monthly expenses. Be sure to include everything, even nominal fees, so you can easily recognize areas where you might overspend. This is where you can cut down and save towards your financial goals.
Start a list with all the expenses you have in one month. For example:
- Housing (rent or mortgage) will likely be your biggest expense
- Utilities (electricity, water, gas)
- Food or groceries
- Transportation costs (fuel, public transportation, fees)
- Insurance premiums
- Subscriptions
- Loan payments
- Memberships
- Variable expenses like entertainment, dining out, and shopping
To help you with this part of the process, it can be a good idea to track your receipts or use budgeting software.
Step 3: Categorize your expenses
Categorizing your expenses is a critical part of the plan. Organize your spending into distinct groups to get a clear idea of where and how you’re spending your money each month. Common expense categories can be split into fixed and variable categories.
Fixed expenses are exactly what they sound like, they don’t change – for example, your mortgage, rent, or car payments are fixed.
Variable expenses, like groceries, dining our, shopping, and entertainment, will change each month.
Knowing where your money goes will help you identify areas you can curb spending and save.
Step 4: Assign amounts to each expense category
Once you know what you spend and where you’re spending it, you can set realistic amounts for each category. This is a critical component of creating an effective spending plan. When you forecast where your money will go, you can ensure your budget corresponds accurately based on how you spend money.
To estimate the budget for monthly expenses in each category, it’s important to look at your prior spending habits to guesstimate how much you need for each section. Erring on the side of caution and overestimating expenses will help you avoid overspending.
Tips to estimate how much you need in each category:
- Overestimate rather than underestimate your expenses.
- Don’t forget about annual expenses or irregular costs like car maintenance or insurance premiums – divide these costs by 12 and include them as a monthly expense in the proper category in your budget.
- Don’t forget about setting aside money for unexpected expenditures.
- Include a small buffer in one of your fixed expense categories (an emergency fund).
Step 5: Subtract expenses from income to calculate the remaining amount
Figure out the remainder of your budget by subtracting your monthly expenses from your monthly income. After covering all your expenses, you can determine how much you have left over.
For example, if your total monthly income is $4,000 and your expenses are $3,500:
Remaining amount = total monthly income – total monthly expenses
Remaining amount = $4,000-$3,500
Remaining amount = $500
Each month’s remaining amount can be used for a variety of purposes, including paying off debt, saving for the future, or building a larger emergency fund.
Step 6: Decide on how to allocate the remaining amount
Now that you know how much money you’ll have left over every month, you can distribute it in appropriate buckets to reach your financial goals. To accomplish this, you should:
- Identify your financial goals – decide what you want to achieve
- Prioritize goals by importance – rank your goals according to urgency
- Distribute funds accordingly – allocate portions of the remaining amount towards each goal based on priority
Tips to allocate your leftover money:
- Create separate accounts – consider setting up separate savings accounts for each of your financial goals.
- Automate your contributions – ensure that you consistently put money towards appropriate goals by setting up automatic transfers each time you get paid.
- Reevaluate periodically – it’s important to review and adjust your allocations regularly, especially if you have a change in income, expenses, or priority.
Step 7: Review and adjust your budget regularly
You should review and adjust your budget often. When your financial situation, spending habits, or saving goals change, make necessary adjustments to ensure your budget remains an effective tool for managing finances.
Tips for reviewing your budget:
- Track your spending – keep track of all expenses by saving receipts, using a budgeting app, or downloading a budgeting tool.
- Analyze variances – each month, you should assess variances between what was spent and what you had budgeted.
- Evaluate financial goal process – track how well you’re progressing towards your goals; look for ways to allocate more money from bonuses, gifts, or any other unexpected financial influxes.
- Incorporate changes – as changes in your life occur, you’ll want to update your budget accordingly so it accurately reflects your financial reality at all times.
Monthly Budget Example
It might help to look at a monthly budget example.
Total monthly income = salary ($4,000) + freelance earnings ($500)
Total salary = $4,500
Fixed expenses = Rent ($1,200) + Car ($300) + Insurance ($150) + Utilities ($100) + Phone bill ($50)
Total fixed expenses – $1,800
Variable expenses = Groceries ($400) + gas ($100) + entertainment ($200)
Total variable expenses = $700
Total income – Total expenses = Extra Money
$4,500 – $2,500 = $2,000
Final Thoughts
Following the 7 steps here, you can create a monthly budget that works for you and helps you achieve your financial goals. Learning how to budget money is essential for managing your finances. With a solid spending plan, you’ll be prepared for the unexpected while being able to pay down debts and save for future goals like retirement or buying a home.
If you’re looking for help on how to budget money or need more information about managing your finances, visit HFS Federal Credit Union today. Our team can provide you with everything you need to know, from setting up automatic savings plans to making smart financial decisions.
Check out our budget sheet template to create your budget and start saving today!
