How to Create a Monthly Budget That Really Works

I was in my mid-twenties before I created my first budget.

I was out of college and had my first full-time job. I made decent money, but I never seemed to have any left at the end of each month. And I couldn’t seem to figure out where all my money was going.

When I finally sat down to track my recent spending, it was an eye-opening experience.

I realized I was spending way more than I wanted to on eating out and ordering take-out.

That’s when I created my first budget. It hasn’t been entirely smooth sailing since then. But I can tell you that the times of my life I’ve been most diligent about monthly budgeting are the times when I’ve seen the most success!

When I budget consistently, I reach my financial goals, feel confident in my financial situation, and have money left over at the end of each month.

Creating and sticking to a budget does not have to be overwhelming. It doesn’t have to be scary. It is 100% doable.

In this post, I’m walking you through how to create a monthly budget, even if you’re a beginner or hate budgeting.

Determine your income

In order to create your monthly budget, you first need to figure out what your monthly income is.

For some of you, this will be easy. Maybe you’re a salaried employee without any side income, in which case your income is the same every month.

But if you’re an hourly employee, a tipped employee (such as a server or bartender), or are self-employed, this will be a little more difficult.

If you have an irregular income, look at the average amount you bring home each month. This will help you identify which number to build your budget around.

Make a list of your fixed expenses

Next up, make a list of your fixed monthly expenses. Fixed expenses are those that are the same every month. This would include rent or mortgage, insurance, cable and internet, student loan, car payment, etc.

It’s important to plan for these expenses first because then you’ll have a better idea of how much money you have to allocate for the rest of your expenses.

Track your spending for the past three (or six) months

Once you’ve figured out your income and fixed expenses, you know how much money is left to put toward variable expenses.

In order to really figure out how much you want to spend in each budget category, I think it first makes sense to figure out how much you’re currently spending in each category.

Go through your bank statements for the past three months and track where your money has gone. I would break your spending up into categories and determine how much you’ve spent monthly in each category. Here are some categories you may want have:

Utilities
Transportation (gas, car maintenance)
Groceries
Eating Out
Shopping
Household Items
Personal Care
Entertainment
Hobbies

These are just some examples of categories you might have in your budget. You can customize them to fit your lifestyle.

By doing this, you’ll get a good idea of where your money has been going and which categories you spend the most on.

I recommend going back at least three months to really get an idea of what an average month looks like.

If you’re feeling really ambitious, go back even further. The first time I put together a monthly budget, I went back six months and it helped me put together a really good picture of my spending habits.

Determine your spending goals

Now that you know how much you are spending, it’s time to figure out how much you want to be spending.

I’m guessing there are quite a few areas in your budget where you could be spending a lot less than you are.

If you don’t normally track your spending, chances are that you’re going to be surprised at your spending in some areas, just like I was at my food spending.

Prioritize savings first

There are a lot of people who wait to see how much money they have in the bank at the end of the month and then decide if they are able to throw a little in savings.

The problem here is that there might be a lot of months where you aren’t putting any money in savings at all.

Instead of just saving what you have left at the end of the month, start budgeting the money you’ll save and making that your first payment after you get paid. I have an automatic transfer from my checking account to my savings account the day after I get paid every single month.

To make your saving even more effective, set specific goals to save for. You can start by building up your emergency fund. Then you can decide what other financial goals you want to save for.

Decide on a debt-payoff plan

While you’re creating your monthly budget, it’s important to factor in how much money you want to put toward debt.

While it might be tempting just to pay your minimum monthly payments, it will take you a lot longer to pay off that debt, and you’ll be spending a LOT of interest.

One debt payoff strategy a lot of people use is called the “snowball method.” This means paying your minimum payments on all but your smallest debt and you put as much money as you can into your smallest debt.

Once that smallest debt is gone, you take all of that extra money and put it toward the new smallest debt. And then, ideally, once you’ve paid off most of the debts, you’ll be able to put really large payments on your largest debt.

I actually prefer a method called the debt avalanche. Rather than targeting the debt with the lowest balance, you target the one with the highest interest rate.

The debt snowball is the most cost effective in the long run, because you’re saving yourself money in interest.

Track your spending

Once you’ve created your monthly budget, it’s important to track your spending to make sure you’re actually staying on track. Otherwise, the budget is useless!

There are plenty of monthly budgeting apps you can connect to your bank account to track your spending. Many people use an app for this. For many years I just used a spreadsheet and tracked each transaction manually. This is definitely more work, and now I use an app to track my spending.

You can check out my list of the best budgeting apps to help find the right tool for you.

As you’re tracking your spending, check in often throughout the month to make sure you’re staying on track with your budget. That way, if you get off track with your budget, there’s still time to get back on track.

Reevaluate your budget often

Once you’ve set up your budget once, you’re not done. A lot can change with your finances. You might have new financial goals come up, such as wanting to splurge on a vacation or start saving for a house.

You also might create a budget and then within a few months, realize there are certain categories that need some tweaking.

Bonus Tip: Find the right budgeting app

Some people are fine with a spreadsheet or plain or pen and paper for their budget. In fact, that’s how I started out. But I eventually found the value there is to be had from a budgeting app.

One benefit of a budgeting app is that you can automatically import your bank and credit card transactions to track your spending. This allows you to see how well you’re sticking to your budget.

There are also budgeting apps that have special features such as the ability to set up sinking funds, calculate your net worth, or calculate your progress toward debt payoff or your financial goals.

Final thoughts

Creating a monthly budget might seem overwhelming, but I promise it will get easier as you get the hang of it.

And even more importantly, you will be SO glad you took the time to set up a budget, and you’ll love the financial benefits you start to see.

Monthly budgeting will go a long way in helping you to start saving money, pay off your debts, and reach your long-term financial goals.

How to Create a Monthly Budget That Really Works - Erin Gobler (2024)