Budgeting Basics: How to Create a Monthly Budget in 6 Steps (2024)

Outlining how much you make and where you can spend that money is an important step in budgeting basics to ensure a strong financial future. While the task might seem daunting, when you break it down into steps, it’s simple and provides valuable insights that ensure you’re meeting your financial goals and closing gaps in your finances. Here’s a step-by-step guide for building a monthly budget.

What is Budgeting?

Budgeting is the process of outlining your household income, the expenses and categories where you’ll spend your money, ensuring you have enough to meet all debt repayment commitments and putting adequate money toward savings for unexpected expenses.

When you follow the basics of budgeting, you’re ensuring you have the funds to meet your commitments but also to cover daily expenses, like groceries, gas to get to work and entertainment funds for your hobbies or interests.

Those fun funds are the first to go when money gets tight or you face an unexpected expense, such as a vehicle repair or medical bill.

The purpose of budgeting is to avoid credit card debt and other forms of overextending yourself, such as taking on too many loans or lines of credit that you can’t cover based on your income. In the long term, it also ensures you have what you need for future expenses, such as a new vehicle when your current car wears out or enough put away in your retirement account to live the life you want once you aren’t working every day.

A budget also gives you something to look back on when you aren’t sure whether you can afford a large purchase, such as a new appliance when one bites the dust. That way you know your budget based on savings and goals and can begin shopping wisely.

Each month, you’ll use your budget to keep spending in line, such as ensuring you don’t go over budget at the grocery store with fun treats or spend too much eating out when you should be cooking at home. In months where you do go over, you’ll then look for ways to compensate and save money in future months or at least prevent that from happening again.

How Does a Monthly Budget Work?

A budget starts by outlining income and commitments. The ability to pay back debt is important as defaulting will hurt your credit and make it more challenging to acquire credit for large purchases like vehicles or a home. Or it might limit where you can rent.

Once you’ve outlined your income and your commitments, you’ll see how much surplus you’re working with each month. From there, you can begin entering essential items, including car insurance, groceries and fuel.

Then each month you’ll enter your actual expenses and compare them to what you budgeted. Ideally, you want to spend what you budgeted or less.

With time, you might need to update various spending categories as expenses change, such as in the case of changes in electricity rates, which are not in your control. Generally, that means pulling money from less important categories, such as eating out or entertainment spending.

The goal every month is to have money left in the bank so that you are not acquiring new debt. And hopefully, that includes putting some funds into your savings for unexpected events or months where your spending in a certain category goes over without your control, such as when fuel goes up by a dollar per gallon suddenly.

How to Create a Monthly Budget

Armed with information on how to budget and save money, you’re ready to go through the motions and start building a realistic budget based on your needs and income levels. Follow these steps to get started.

1. Assessing Your Income and Expenses

Start by outlining your income. This includes all income from traditional jobs as well as income from side hustles, such as walking dogs, mowing lawns or taking part in the gig economy with rideshare or grocery delivery. While some side hustles don’t offer consistent income, you can put the lowest amount you make with your side business each month as a guide. Add them together, and this will be the baseline for your budget.

Now outline necessary expenses, such as mortgage payments, loan repayments or car payments. Next, you need essential household expenses required to live. This includes utilities, fuel, insurance and medical expenses. Again, these items can fluctuate month to month so input an average of what you’ve spent for the past 12 months as your guide.

Budget for groceries. This is another essential category, but one where there is a great deal of flexibility. For example, you don’t need steak to live, but perhaps you enjoy having it as part of your menu once per month. And you certainly don’t need cookies or treats to nourish your body, but they do make life enjoyable. Be realistic about how much money you need to spend to survive and then add in some padding for those items that make life enjoyable only if you have the funds.

Finally, you can add fun categories, such as eating out and entertainment. Entertainment budgets should include all streaming services and digital commitments you have. As you outline these commitments, you might find you’re spending more than you realized in these areas and need to make some tough choices.

Review your credit card and bank statements from the last few months to make sure you didn’t leave anything out, such as ongoing vet bills for your pet or other expenses unique to your household.

2. Setting Financial Goals

Once you have a good concept of the money you must spend, you’re ready to outline your financial goals and how to get there. Financial goals break down into three main categories:

• Short-term: kitchen remodel, new tires for a vehicle, updated appliances, vacation
• Long-term: retirement, house, vehicles
• Emergency fund: money in case of the unexpected, such as an illness or medical condition that sends you to the hospital or many visits to a specialist that will cost you thousands of dollars even with good medical insurance

You should set savings goals in each of these categories to care for your financial well-being and help you live the way you want to. Money should go into these categories before it goes into the fun ones of eating out or entertainment.

3. Creating a Budgeting Framework

As you explore how to budget money, you’ll learn about many different budgeting frameworks. You might need to use some trial and error to see what makes the most sense to you and makes budgeting manageable for your day-to-day life. Here are some frameworks to consider.

• Zero-based budgeting: Spend every dollar in a predetermined way that you’ve outlined in advance.
• Envelope budgeting: People who aren’t great with numbers find this method helpful because it involves putting cash in categorized envelopes and only spending the cash in that category each month.
• Incremental budgeting: Use last year’s actual expenses and reduce it by a percentage to get to this year’s budget based on your goals.
• Cash budget: Anticipate payables and receivables to come to a total amount required for the year.
• Value-based budgeting: Start with the most important expenses you must meet and then put money in the places that matter most to you, such as travel, to find a way of life that fits your income but also matches what you value.
• 50/30/20 budgeting: This method allocates 50% of your budget toward necessities, 30% toward wants and 20% to savings and debt repayment each month. It’s considered a more flexible budgeting method because it has three broad categories instead of being really detailed with various expense categories.

4. Allocating Funds and Tracking Expenses

No matter the budgeting framework you’re using, you’ll need to evaluate what spending categories are most important to you. Prioritize those categories and put realistic numbers there. You might use budgeting percentages to outline how much of your income goes into each category or use real dollar amounts.

Once you’ve allocated your funds and ensured you aren’t planning to spend more than you make, you’re ready to start tracking your expenses month to month.

As you get into budgeting, you might find that some numbers you’ve entered are not realistic. You’ll need to make adjustments accordingly from one month to the next to keep your budget workable.

Each month, you’ll input actual expenses and compare them with what you allocated in that category. This will help you better understand your spending and make lifestyle adjustments to match.

5. Adjusting and Reviewing Your Budget

You can’t create a budget and expect that it is just done now and you can start enjoying spending your money. You’ll need to reevaluate it regularly. Each month, you might notice minor changes you need to make, or a life event might call for a full overhaul, such as in the case of moving, welcoming a child or changing jobs.

Then there are annual pay raises, which can also call for changes to your budget or how you want to allocate the new funds, especially considering long-term goals.

Give your budget a light review each month and a full overhaul annually for the best results and to meet financial goals.

Tips for Staying Motivated and Disciplined

Getting started with budgeting basics is challenging but it’s also worthwhile. Consider these tips for staying motivated to reach your goals and being disciplined in your spending.

• Create a support system or find an accountability partner: when you surround yourself with people who respect your budget, you’ll feel less tempted to go on a spending spree. For example, having friends who know and respect that you don’t want to go out to a fancy restaurant every month can reduce the temptation and peer pressure.
• Celebrating small milestones and successes: When you hit a savings goal or accomplish a short-term financial milestone, recognize and celebrate that success. When getting started, success might be your first month you don’t go over in any spending category. Years into the process, a milestone might be purchasing the vehicle you’ve always wanted with minimal financing.
• Use an app: Budgeting should not feel like a chore. There are many apps that allow you to connect your financial accounts into one place to see income versus expenses quickly and easily.
• Find effective stress management techniques: While a day at the spa can be relaxing and help you decompress from a stressful project at work or a busy period at home, it’s also expensive. Look for ways to manage stress that fit within your budget so you don’t become an emotional spender. Retail therapy is also dangerous, so find ways to spend your time that you still find entertaining and enjoyable but put less strain on your budget.
• Break big financial goals into smaller ones: When you’re working to save tens of thousands of dollars toward something like a home down payment, it can feel impossible. Set smaller goals that you can achieve each year to stay motivated and focused on the goal. That way, when you save $10,000 per year for the next six years, you know you’re one step closer to your dream home and your goal.

Common Budgeting Mistakes to Avoid

You should take steps to ensure your financial success. But also consider these activities to avoid, which can derail you from your goals.

• Failing to track expenses
• Overspending in categories of want instead of need
• Shortsightedness that prevents you from planning for the unexpected
• Failing to adjust your budget as your circ*mstances change
• Putting too little in a budget category, especially for expenses that fluctuate
• Leaving out seasonal expenses, such as holiday presents or summer vacations
• Buying things on credit too often
• Failing to prioritize the most important expenses first
• Struggling to account for jobs that have irregular income, such as construction workers who stay busier during the warmer months

Achieving Financial Wellness Through Disciplined Budgeting

While budgeting is not a fun activity, it does carry with it a huge sense of accomplishment as you work toward financial goals, pay off debt and achieve the life you want. Follow the steps above to begin working toward financial wellness and avoiding overspending, which leads to unnecessary debt.

Frequently Asked Questions