How to Create a Monthly Budget

January 31, 2023
Monthly budgets can be a good way to track spending and set savings goals. Follow these three steps to set up a monthly budget.

When it comes to investing, the first thing you need is money to invest. By creating a monthly household budget, you can figure out where all your money goes, allowing you to set aside cash to save for your goals, including saving for retirement.

Having a written plan is key. It can be a simple monthly budget—just jotting down numbers on a piece of physical paper—or you can go digital with a spreadsheet or software.

Set it, but don't forget it

To help you get started, here's a step-by-step guide on how to make a monthly budget. Before you get going, gather up your documents—bank statements, pay stubs, credit card statements, and anything else that pertains to your income and expenses.

Next, do a little soul-searching and goal-planning to help you determine what's important and what isn't. What are your long-term and short-term goals? Examples might include saving for retirement, building an emergency fund, or saving for expenses, such as a child's college education, kitchen remodel, or destination vacation.

Now you're ready to tackle the budget in three steps.

Budgeting 101

Step 1: Plan a budget

Start a budget by identifying your income and figuring out your spending priorities. Label your expenses into two categories: nondiscretionary ("must-have" items) and discretionary ("nice-to-have" items). Then list your sources of income, making sure to include any bonuses, gifts, or rental property in additional to your regular wages.

Step 2: Create a budget

Plug concrete numbers into your plan. Make sure to include your income and itemized expenses and then do the math. A monthly budget planner can help you calculate your current income and expenses. If you're coming up short, try seeing what expenses you can reduce or eliminate altogether.

Step 3: Keep track

Regularly monitor your budget to make sure it's accurate based on your current spending habits and update as needed. A good suggestion is tracking your spending for 30 days to ensure it matches your projections. If you're having trouble staying on track, consider a spending tracker to track your spending over a period of time, giving you a clearer picture of where your money is going on a regular basis.

Know your spending habits

Knowing your spending habits can help you create a more realistic budget to help you reach your investing goals. For example, don't set an unrealistic budget of $20 per month for necessary items like groceries.

By tracking spending habits over time, you can find some natural averages that work out. Tracking expenses over time lets you determine realistic averages for necessary items like rent or utility bills and discretionary items like eating out or date nights. You want to budget for fun, but not to the point of undermining your ability to meet important goals.

Fun absolutely should be a line item in everyone's budget, even if it's smaller than you'd like, based on your financial situation. But if you don't include it, you won't stick to your budget, and you'll end up hating it. With a realistic monthly budget that balances needs and wants, you'll understand where all your money goes and determine where you might free up money for key goals you want to pursue, like a vacation or down payment on a home.

Budgets will change when major life changes happen, and even small events may alter them. Pay raises, windfalls, or short-term setbacks make regular check-ins worthwhile. At these times, you'll want to revisit your budget and consider allocating extra money to pay down debt or retirement savings. Or you may need to cut back on certain discretionary expenses to get through a setback.

Likewise, new goals will undoubtedly pop up, and you'll want to re-evaluate your budget, and potentially adjust your spending and saving to pursue them.

The biggest thing to understand about budgeting is the relationship between income and expenses and how they factor into your savings goals.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.