How to Create a Monthly Budget (5 Simple Steps)
A budget isn't about restricting yourself - it's about spending intentionally on what matters. Here's how to create a monthly budget that actually works.
The Goal: Know exactly where your money goes and make sure it aligns with your priorities.
People who budget are 42% more likely to hit their financial goals. Let's get you started.
5 Steps to Create Your Monthly Budget
Calculate Your Monthly Income
Add up all money coming in each month after taxes. Include salary, side hustles, and any regular income.
Pro Tips:
- Use your net (after-tax) income, not gross
- If income varies, use the average of the last 3 months
- Include partner's income if budgeting together
List All Monthly Expenses
Write down every expense, from rent to subscriptions. Review bank statements for the last 3 months to catch everything.
Pro Tips:
- Start with fixed costs (rent, insurance, subscriptions)
- Then add variable costs (groceries, gas, entertainment)
- Don't forget quarterly or annual expenses (divide by 12)
Categorize Your Spending
Group expenses into categories to see where your money goes. Most people are surprised by their actual spending patterns.
Pro Tips:
- Use the 50/30/20 rule as a starting point
- 50% needs, 30% wants, 20% savings/debt
- Adjust based on your goals and situation
Set Spending Limits
Based on your income and goals, set a target amount for each category. Be realistic - extreme budgets don't last.
Pro Tips:
- Start with current spending as a baseline
- Cut gradually rather than drastically
- Leave room for unexpected expenses
Track and Adjust
The budget isn't set in stone. Review weekly, adjust monthly, and don't beat yourself up over imperfect months.
Pro Tips:
- Use an app to track automatically
- Review spending weekly (takes 5 minutes)
- Adjust categories that consistently over/under spend
Example Monthly Budget ($5,000 Income)
| Category | Amount | % of Income |
|---|---|---|
| Housing (rent/mortgage) | $1500 | 30% |
| Transportation | $400 | 8% |
| Groceries | $400 | 8% |
| Utilities & Phone | $200 | 4% |
| Insurance | $200 | 4% |
| Dining Out | $200 | 4% |
| Entertainment | $150 | 3% |
| Shopping | $150 | 3% |
| Savings | $500 | 10% |
| Debt Payments | $300 | 6% |
| Miscellaneous | $200 | 4% |
| Total | $4,200 | 84% |
Note: This leaves $800 (16%) as a buffer for unexpected expenses or additional savings.
Popular Budgeting Methods
50/30/20 Budget
50% needs, 30% wants, 20% savings. Simple and flexible for beginners.
Best for: Beginners who want a simple framework
Zero-Based Budget
Every dollar has a job. Income minus expenses equals zero.
Best for: Detail-oriented people who want full control
Envelope System
Allocate cash to envelopes for each category. When empty, stop spending.
Best for: People who struggle with overspending
Pay Yourself First
Automatically save a set amount, then spend what's left freely.
Best for: People who prioritize savings over tracking
Common Budgeting Mistakes to Avoid
- Being too restrictive: Extreme budgets lead to burnout. Allow some fun money.
- Forgetting irregular expenses: Car repairs, gifts, and annual subscriptions add up.
- Not tracking: A budget only works if you check it. Use an app for easy tracking.
- Giving up after one bad month: Everyone overspends sometimes. Just reset and continue.
- Ignoring shared expenses: If you split costs with roommates or a partner, track those too.
Best Tools for Monthly Budgeting
You can budget with pen and paper, but apps make it much easier:
- Savida (Free): Automatic tracking, expense splitting, and AI coaching. Best for people who share expenses.
- YNAB ($14.99/mo): Best for zero-based budgeting enthusiasts.
- Google Sheets (Free): Best for spreadsheet lovers who want full control.