Having a monthly budget is one of the best things you can do for your finances. Budgeting gives you control over your money to save more, pay off debt, and work toward financial goals. While budgeting may seem intimidating initially, it gets much easier with practice. Follow the steps below to create a successful monthly budget.
Calculate Your Net Monthly Income
The first step in budgeting is to calculate your net monthly income. This is your total take-home pay after taxes and other deductions are removed.
Make a list of your regular monthly income sources. This may include your salary from your job, side hustle income, freelance work, child support payments, and any other funds you receive each month. Don’t forget quarterly or annual bonuses or income—you will want to calculate these monthly.
For example, if you earn $4,000 per month at your job and make $500 from freelance work each month, your total gross monthly income is $4,500.
Next, subtract any taxes, insurance premiums, 401k contributions, and other deductions from your paycheck. Your deductions equal $1,000 each month.
Your net monthly income would be $3,500 ($4,500 minus $1,000). This $3,500 is the amount you have to work with in your budget each month.
Track Your Expenses
Now that you know your net income, it’s time to consider your expenses. Tracking where your money is going is crucial for developing a realistic budget.
Dig up your bank and credit card statements from the past 3 months. Go through each transaction and assign it to a budget category like housing, transportation, food, entertainment, etc. Some expenses may remain the same each month, while others fluctuate.
If you have sparse records, you should track your spending closely for a full month to see where your money is going. Use an app or spreadsheet to categorize expenses as you make them.
This spending snapshot will show your must-have expenses, prioritize spending categories, and reveal areas where you can cut back.
Create Your Budget
With your income and expenses in hand, it’s time to create a budget. Make a list of all your expense categories and projected amounts for each based on your spending analysis. Consider needs vs. wants and give every dollar a purpose.
Some top budgeting categories include:
- Housing – rent/mortgage, property tax, homeowners insurance, etc.
- Transportation – car payment, gas, maintenance
- Groceries
- Dining out
- Utilities – electricity, water, cable, phone
- Car insurance
- Health insurance
- Debt payments
- Entertainment subscriptions – Netflix, Hulu, etc.
- Miscellaneous personal spending
- Retirement and savings contributions
Make sure your total monthly expenses don’t exceed your net income. If they do, look for places to save – like eating out less, finding cheaper insurance, or lowering your utilities.
Adjust and Refine Your Budget
Your first budget won’t be perfect. As the month progresses, you may realize you need more or less for different categories.
You may have underestimated your grocery costs and need to take $100 from dining out to accommodate your food expenses. Or you overestimated your utilities so that you can shift that money to savings.
Revisit your budget mid-month and adjust category amounts as needed. Tracking your daily spending will make this easier. Get into the habit of checking your budget weekly or biweekly all year. As your financial situation changes, keep refining your budget numbers.
Use Budgeting Tools
Apps and spreadsheets can simplify and automate parts of the budgeting process. They provide handy visuals of spending and make your budget accessible on your devices.
Mint and You Need a Budget are two popular budgeting tools. Excel spreadsheets also work well for DIY budgets. Use them to color code categories, graph expenses, and calculate category percentages or totals.
Automated tools connect directly to your financial accounts for easy monitoring. But you’ll still need to input some cash transactions manually. Choose a tool that suits your needs and preferences.
How Budgeting Changed Mia’s Life
Let’s look at a case study to see how powerful budgeting can be.
Meet Mia. She’s a 27-year-old marketing professional earning $60,000 per year. In the past, Mia struggled to save money each month and relied heavily on her credit cards. She wanted to pay down her credit card debt, build an emergency savings fund, and start saving to buy a condo.
After learning how to budget properly, Mia’s financial life has taken a turn for the better. Here are some of the ways budgeting helped her:
- Paid off $8,000 in credit card debt in 14 months by allocating extra money monthly to repay debt.
- Built up a $5,000 emergency fund over 7 months by setting aside money to save immediately each pay period.
- Started contributions to a condo downpayment fund. She sets aside $300 per month and already has $2,100 saved up.
- Gained awareness of unnecessary expenses that were derailing her finances. She saved over $200 monthly by dining out less and being smarter about subscriptions.
- Reduced her stress levels and gained hope for achieving her financial goals. Budgeting gave Mia clarity and control over her money.
Budgeting made achieving Mia’s financial goals feel attainable. She could allocate her money per her values and priorities instead of wondering where it went each month. Her success story shows that budgeting can truly improve your financial life!
Creating a monthly budget takes some effort but pays off tremendously in the long run. Follow the key steps:
- Know your net monthly income
- Track your full spending picture
- Create a categorized budget
- Adjust and update your budget
- Use tools to simplify the process
Budgeting allows you to align your money with your financial goals. Dedication and consistency can create financial stability and a brighter future!
Conclusion
Creating a budget and sticking to it is one of the most impactful things you can do for your financial situation. Though it requires dedication, budgeting gives you control over your money and can help you achieve your financial goals.
When you track your full spending picture and allocate your income consciously, you gain insight into your priorities. Budgeting enables you to align your money with what matters most to you.
Budgeting leads to financial success on any income level. It is an essential tool for building wealth and reaching your money milestones. Embrace budgeting as a lifelong habit, and your financial freedom will unfold one month at a time.