Step-by-Step Guide: How to Make a Monthly Budget

Written by WealthVine Staff

You might imagine a budget as a tight restriction that cuts all the essentials off your wishlist, only leaving room for the boring things. In reality, it’s the other way around.

We're in financially hard-hitting times. Today, a budget might be a saving grace rather than a villain. Continue reading to learn how to make a monthly budget.

What Is a Budget?

A budget is a record of the money you earn, how you spend it, and if there’s potential for some side-swept funds for big decisions. It helps understand spending habits and what prospects can lead to better money management.

Why Is It Important?

These are four main factors that make budgeting a wise choice.

  • It helps control and prevent debt. With your income listed, you’ll use your credit cards per your earning and not exceed a certain level. Less credit card usage means you’ll be able to pay in time and will be debt-free.
  • It gives you the ability to achieve realistic goals promptly. You will know exactly how much you’ll need to make a downpayment for a house or when you can finally get that car. Budgeting helps you save for the more important priorities of life.
  • It gives you an emergency buffer. A planned budget will help you prepare for uncertainties like a medical emergency, job loss, or some other unimaginable scenario.
  • The emotions that sway when you put your mind into something as important as money management creates a sense of responsibility towards one’s financial activities.

Why Do You Need a Budget?

In other words, a budget helps keep track of your income, expenses, and savings. It creates a clearer image of your cash flow (both in and out) and takes little time to learn.

So, whether you’re a college student, a professional, or a freelancer, budgeting is vital for everyone. This comprehensive guide will teach you how to create a budget plan hassle-free.

Step 1: Gather All Your Tools

Gather all your paperwork. Also, grab a paper spreadsheet, create a spreadsheet in MS Excel for easy access, or use a budget app. You will need data from the last three months for the first four categories.

  • Utility Bills
  • Back statements
  • Credit Card bills
  • Receipts
  • Investment account data (if any)
  • Tax documents
  • Mortgage or auto-loan contracts

You may come across some irregular transactions, but all these financial statements will give a rough glance at your cash flow.

Step 2: Calculate Your Net Income

The income you have at hand after tax deductions is your take-home pay. Count in child support, grants, pension, etc. All forms of regular payment coming from other sources are part of the budget plan.

To determine your monthly income, use the following formula to calculate the exact amount:

  • If you get paid weekly, multiply one week's income by the total number of weeks in a year (week payx52) and then divide by 12.
  • If you earn by-weekly, multiply your fortnightly income by the number of paychecks you receive in a year (bi-weekly payx26) and divide by 12.
  • If you’re a freelancer or work on a commission basis, you probably don’t have a regular income. In this case, take the last three months’ earnings and divide them by 3. Set it as a base for the budget.

Step 3: Note Your Expenses

Once you've gathered all your income statistics, go ahead and jot down all the expenses.

Start with the most immediate needs, like mortgage or rent, utility bills, grocery, childcare, and transportation. These are the primary expenses paid out every month. Next, list secondary or irregular amounts paid annually or bi-annually, like insurance, car registration, taxes, etc.

Categorizing expenses will help you understand what part consumes the most money and which you need to control.

Split Them Into Sub-Categories

To determine whether you can accommodate savings, or meet future goals, divide the expenses into fixed and variable.

Fixed expenses are the obligatory amounts paid monthly, and you can't skip them, such as house rent or mortgage, utilities, credit card bills, car payments, cellphone and internet bills, and more. These signify needs (with some exceptions) and are necessary for a regular lifestyle. If this part takes up most of your income, it can become cumbersome to make adjustments.

Variable expenses are based on lifestyle and differ in amounts spent every month, for example, gasoline, groceries, shopping, dining, entertainment, gift, travel, etc. These are also (sometimes) an indication of wants people fulfill out of impulse and often end up buying things they don't need. Impulsive spending usually happens on holidays, while shopping out with friends, or in some cases, due to stress.

Step 4: Compare and Calculate

When you've listed your income and all expenses, it's now for a side-by-side comparison (imagine drumroll). Subtract expenses from the earnings, and as a result, one category will probably outweigh the other. If you have some extra balance, it's a good sign. You can use this money to pay off debt or save it aside for rainy days.

But if expenses surpass income levels, this means you may be overspending on non-essential commodities and need to make adjustments to the budget.

Step 5: Choose an Approach

Gathering so much information and putting your mind into it can be a tiresome job. With budgeting, this is only half the battle. Your main goal is to manage your expenses to save more for the future. Depending on feasibility, you can pick either of these two strategies.

#1 Zero-based Budget

A zero-based budget is a way of budgeting where you allocate all of your income to expenses, equalling zero. All of your earnings have to go under a category. This includes fixed and variable costs, savings, debt, even occasional spending like birthdays, etc. Here’s how to create a zero-based budget:

  • Write down your income, including a paycheck, child support, commissions, or side-hustle earnings, any other sources after taxes.
  • List your expenses before the month changes. Begin with the four-walls comprising utilities, food, shelter, and transport. Then list essentials and non-essentials. Don’t forget to add a savings and debt (if any) category.
  • Upon subtracting expenses from the income, the result should equal zero. There's no need to worry if your amount does not balance at first. It takes some practice, and most people get the hang of it within a few months.

The primary concept of zero-based budgeting is to put every dollar to use. If you still have some money left, adjust it in the savings or debt section to pay off. Then track your budget every month and make adjustments.

#2 The 50/30/20 Rule

This budgeting technique is pretty straightforward and follows a simple concept. You allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt. You can adjust the percentage according to your financial stature. For example, if you’re under a financial obligation, you can shift a good chunk (more than 20%) of your income to the savings and debt dept.

You can modify these percentages in unforeseen circumstances, like sudden repairs, a family wedding, medical emergencies, etc.

Step 6: Follow Up

Once your plan is in action, keep track of your progress every month. The spending patterns within the budget will help you spot out unnecessary expenses. Make changes every month that help lower unneeded costs, and focus on saving for significant goals like college fees, purchasing property, paying off a loan, and more.

Budgeting Tips

  • Utilize your talents or hobbies to add more to your income. You can put your writing skills to use, sell stuff online or even walk the neighbor’s dog for some extra cash.
  • Learn to differentiate between a necessity and luxury. A car is a basic need, but a Mercedes Benz is pure luxury. You’ll need to cut down the opulence to lower expenses.
  • Substitute specific wants such as homemade coffee over a Starbucks latte. You’ll be surprised at how much you saved on those coffee bills in a month.
  • Involve everyone in the family. Make it a fun activity and educate everyone on how important it is to spend wisely and how they can contribute.
  • Ditch the credit cards and use cash where possible. Limit how much money you spend and save receipts for checking later.
  • Create a separate column within your budget for any debt and loans, and make it a priority to get rid of it first.
  • Use a budget calculator to save time. The software will also rollover your entries into the next month.
  • If you need professional help, get in touch with a credit counselor, who will recommend strategies for expense trimming, increase income levels and guide you on debt-relief programs.


A budget is no magic spell that will change your financial health overnight. But it can improve finances gradually in a systematic way. The outcome of a well-planned budget will reflect on your mental and physical health as well. When you’re aware of every hard-earned dollar spent, it calls for a sigh of relief and relaxation.


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