Creating a monthly budget to manage and track your expenses is one of the most effective and empowering tools for improving your finances. However, according to a 2021 survey by The Penny Hoarder, more than half of Americans do not use a budget (55%) or know how much they spent last month (56%).
There are a variety of ways to create a budget, from pen and paper to spreadsheets to mobile apps, but regardless of how people choose to budget, the benefits are clear: According to a 2022 survey by Debt.com, nearly 85% of respondents who budget say it helped them get out or stay out of debt. If you are not yet utilizing this valuable financial tool, here are some easy steps to get started.
- Determine your monthly net income
Start by calculating how much money you take home each month after taxes. If you receive a regular paycheck through your employer, the amount listed on your paycheck is usually after taxes have been subtracted. If you are self-employed and/or do freelance work, you will need to subtract taxes from the payment amounts you receive to determine your net income. According to the Internal Revenue Service (IRS), the self-employment tax rate is 15.3%. If you receive alimony, child support, or government benefits, be sure to include those amounts too.
- Calculate your monthly expenses
Now that you know how much money you have coming in each month, it is time to figure out how much money is going out each month. This is perhaps the most time-consuming part of creating a monthly budget, so be patient and remind yourself that it will be worth it in the end. List out all your monthly expenses, including rent/mortgage, loan payments, insurance premiums, utilities, internet, phone, groceries, gas, childcare, etc. Once you have your list together, label each expense as either fixed or variable. Fixed expenses are bills with amounts that remain the same each month like rent and streaming services, while variable expenses may change month to month, such as groceries or your electric bill. For variable expenses, you can determine an average monthly cost by looking at how much you spent on those items for the past three months.
- Subtract your monthly expenses from your monthly net income
If you have money left over after you subtract your monthly expenses from your monthly net income, this is your discretionary spending. What you choose to do with this money is up to you, but building an emergency fund, adding to your savings, and investing for retirement are all good options. If you find that you are spending more each month than what you are bringing in, it is time to look at areas where you can cut back, particularly your variable expenses. It may also be worthwhile to look at when your bills are due versus when your paychecks are coming in to help you avoid late or missed payments. Many recurring bills will allow you to change your payment due date, which can help you ensure you are being paid before your bills are due versus after.
Once you have followed these three steps, congratulations! You now have a monthly budget. Making good financial decisions is a lot easier once you know how much money you have coming in and going out. Although changing your spending habits will not happen overnight, creating and sticking to a monthly budget is an important step toward taking control of your finances. However, if you find that you are struggling to create or stick to a monthly budget, or you are just ready to take your financial wellness to the next level, consider working with a financial advisor, who can help you create a plan to reach your goals and keep you accountable along the way.