Budget and calculator: doing the math.
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Creating a monthly budget. It’s one of the first steps in getting your personal finances on track. But many see it as too daunting a task, while others see it as a bunch of busywork that isn’t worth the trouble. They think, “If I make it through the month and have money left over, I don’t need a budget, right?”
But such thinking only holds true in the short term. If you have long-term goals and aspirations, you need to know if, when, and how you can achieve them. So you need to make a budget, and stick to it.
- Think of a budget like a road map—a reflection of where you are now and where you’d like to go.
- When making your first budget, start by reviewing your past few months of spending.
- Adjust your budget as your priorities change.
5 steps to setting a monthly budget
Think of your budget as a road map for your money. It lets you see where you are in your journey and helps you reach your next destination. With a budget, you can get a better idea of how each dollar should be used to make the most of your income.
Your monthly budget planner sets the tone for your money—and helps ensure your priorities are taken care of. Here are some practical steps to make a monthly budget.
1. List your income sources
Start by listing your sources of income. Write down how much you receive and the dates you expect to get paid.
- Job and other steady income sources? List your paydays and how much is deposited into your bank account. Also, if you receive regular payments from a pension, trust, or other source, list those as well.
- Variable or irregular income sources? List these using an average amount you can expect each month based on the previous year’s income. Consider designating one day each month as your “payday” for budgeting purposes.
- Chart it. A calendar can help you visualize the dates you expect to receive money. Green is a good color for denoting paydays.
Once you know how much is coming in, you’ll be better prepared to make decisions about where that money should go—and you’ll know exactly what you’re working with.
2. Review your spending
When setting a monthly budget, you should know how you’ve been spending your money. Download and review your bank and credit card statements for the last two or three months, then:
- Think about common budget categories you’re likely to spend money on. These might include utilities, groceries, gas, travel, entertainment, clothing, and personal care.
- Use highlighters in different colors to identify categories and add up how much you usually spend on each category.
- Decide how each expenditure fits within your budget categories.
- Note when your regular bills are due. If you’re using a calendar as a visual aid—or if you’ve plugged your income and expenses into a budget spreadsheet—use different colors for expenses and income items.
A spending review like this can be an eye-opener. You might be surprised to discover how much you’re spending at certain stores or in different categories.
Many bank accounts and credit cards will categorize your purchases with labels for utilities, travel, groceries, gas, and so on.
3. List your financial priorities
Next, list your financial priorities. Do you want to pay down debt? Save up for a vacation? Put money aside for retirement?
All these priorities are important—but some matter to you more than others. Rank them, starting by “paying yourself first” by allocating money toward retirement and emergency savings. Don’t forget to put needs like housing, groceries, insurance, and utilities near the top of the list.
By listing your priorities, you’re more likely to make a monthly budget you can stick to, and one that doesn’t feel like deprivation. Compare your priorities with what you’ve been spending your money on. You may realize you’ve been throwing money away on things that don’t matter to you. Take this opportunity to cut unimportant things from your budget.
4. Align your expenses with your income
Now we get to the meat of setting a monthly budget. When do your income sources hit your bank account? How do those line up with the due dates on your bills?
When possible, attempt to divide expenses in a way that allows you to have a smoother month. Perhaps you go grocery shopping once a week to match up with your pay schedule—and to help you avoid wasting food.
Many bank accounts allow you to use subaccounts to save for specific purposes, such as a vacation or a down payment on a home. Set up automatic transfers from your checking account to those subaccounts on a regular schedule that reflects when you receive income and pay your other bills.
Go through your list of priorities and budget categories and assign dollar amounts to each based on when you’re paid.
5. Tweak your monthly budget as needed
Your budget doesn’t have to be set in stone. After following it for a few months, you might discover that you need to allocate more money to one category and less to another. Feel free to adjust as your priorities change.
Consider reviewing your monthly budget each year to see if you need to make a major overhaul. For example, if paying down debt was one of your budget priorities and now you’re debt-free, you’ll need to reevaluate your situation and determine what to tackle next and how to allocate your newly available money.
The bottom line
Your monthly budget isn’t a millstone dragging you down. Instead, it’s a reflection of your priorities and goals. Take time to review where you are and then use your budget to create a road map to where you want to be. With a budget, you’re the director of your financial resources, putting your money to work to help you reach your goals.
The 50-30-20 rule is a strategy for planning your budget around the things you need, some things you want, and financial goals for the future.
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