How to Create a Simple Monthly Budget

As challenging as creating a monthly budget can be, the approach you take doesn’t need to be complex. The goal of any budget is to decide where your money is going to be spent, before spending it. The real challenge is creating a budget that is a true reflection of your life, and not some unachievable version.

If your budget completely eliminates spending money on meals outside the house, covering the cost of an unexpected expense, and hobby spending, it will get very frustrating. To account for the unpredictability of life, and to maintain your sanity, it is critical that you create a budget that reflects your life.

The first step to designing a budget is to determine the difference between your anticipated income and anticipated outgo for a given month. Anticipated income can be your salary, money from freelancing or other small business endeavors, money from your rental properties, and/or your investment returns. Considered expenses can be your mortgage or rent, food, transportation, utility costs, subscription costs, debt payments, purchases, entertainment, and savings.

A budget is not only about having your expenses be less than your income. A good budget can help you keep track of where your money goes, just as cloud storage can help you keep track of where your important digital files are stored. Creating a budget can help reduce the number of times you get to the end of a month only to wonder where your money went, while organized cloud storage can help you avoid wondering where your files are.

Start With Your Actual Income

Before you start thinking about how much you can afford to spend, work out how much you can realistically spend. You need to assess how much money actually comes into your account each month. For most people, this is a simple math problem. For some, this is more of a challenge. Budgeting assumes that the best you can expect is the worst case scenario. So, if you are unsure each month how much money you may have, budget around what you will likely have and spend what you earn beyond your budgeted amount.

If you know roughly how much money you will earn next month, estimate that amount. If you also know when you will receive the money, base the next month’s budget off of that date.

Track Your Spending Before You Change It

To find out the best place to start budgeting, you have to understand your current spending.

Month end tracking of this nature is the only way to make the reductions you need without self-deprivation. You may actually find that you are surprised by the amount either your electronic or cash transactions are adding up. You may also find that you have a list of small subscriptions and memberships that are getting money that you would be better off saving or putting towards something important.

Month end tracking is not meant to be punishment. It is to find out your spending habits so you can control your finances and modify your behavior based on your goals.

Fix Expenses and Variable Expenses

When you start budgeting, you’re able to categorize your expenses. There’s a lot of flexibility for putting your spending into categories, but fixed expenses will fall into the predictable range. These kinds of expenses include rent, loans (and their payments), insurance, and subscriptions. Other kinds of expenses are flexible, meaning their spending amounts can dramatically change from month to month. These kinds of flexible expenses include groceries, clothes, eating out, entertainment, and shopping.

Budgeting becomes so much easier when you distinguish fixed and flexible expenses. You can’t budget the same way for both. Flexible expenses provide room to adapt your spending in other areas, and fixed expenses have no room for adjustment because of their inflexibility.

Keep It Simple With Your Budget Categories

The most common mistake in budget creation is the unnecessary complexity of a budget system.

At the outset of developing a budget, people may think of categories for coffee, snacks, streaming services, transport and fuel, grocery, clothing, gifts, entertainment, and dozens of others. While some people may like to keep a meticulous list, it is debilitating for most.

Create a simple system with broad categories.

If you create a simple system with broad categories like savings, debts, personal spending, groceries, food, entertainment, transport, and utilities, it will be easy to manage. There are no right and wrong categories; only what is most applicable to you. Your categories don’t need to include every single thing. You are only trying to create manageable systems.

A budget is created to help a person make decisions. Any budget system that becomes a burden to maintain defeats its goal.

Set Savings Goals

Saving money is a lot easier when you know for certain what that savings is meant for.

Create savings goals to give your savings a reason and a plan. You could build an emergency fund, save for a large future purchase, save to go on a trip, save to leave a cushion fund for the future.

Different goals will have varying time frames. Money set aside for short-term needs should be treated differently from money set aside for longer term finances.

The amount you plan to save should fit your income and situation. The main goal should be to include savings in your plan rather than letting savings be a surprise at the end of the month.

Keep in Mind Irregular Costs

A monthly budget could be balance perfect until a cost which is paid yearly or infrequently happens.

Costs such as home/car repairs, medical costs, travel expenses, insurance payments, holiday or gift costs, and school related costs can disrupt a budget when they are treated as unexpected.

If you know costs occur yearly or infrequently, try to estimate what you will spend and save that amount throughout the year.

For example, if you know you will have to spend $600 in a year, saving $50 monthly will give you the money you need when that particular cost comes. This idea can be used for all currencies.

Plan for Life

A strict no-fun budget usually fails and is not enjoyable to stick to.

Everyone needs the ability to spend money on things that bring enjoyment. This might mean dinner with friends, a trip to the cinema, a hobby supply, or a small impulse purchase, or an activity on the weekend. Dining out with friends, movie nights, hobbies, purchases less than a hundred dollars — none of these means you’re a terrible money manager.

The real problem usually lies in the absence of guidelines on discretionary spending.

Set a personal spending limit, and don’t second guess each purchase. A responsible budget should be flexible.

Create A Small Emergency Buffer

The plan is often derailed by unforeseen expenses that disrupt even the most planned budgets.

An emergency buffer is crucial. Inevitably stuff breaks, money is needed to buy stuff, you may experience a months-long unplanned income break, you may need to buy stuff, or various other surprising and budget disrupting things will happen. If you don’t have an emergency buffer, you may be forced to use your credit or reduce your savings goal.

An emergency buffer can be a large or small safety net depending on how unpredictable your income/expenses are.

You don’t have to set up a large buffer right away. Even a small safety net is better than no safety net.

Include Debt Payments in Your Budget

Payments on debts should never be segregated in budgeting.

Payments for debts should be added in your budget and you should consider the required payment and any interest associated with it.

Consider what you can afford to pay towards debt and how that will impact your budget to ensure you are able to sustain payments.

The cost of carrying a balance is especially pronounced with high-interest debt, and it is important to understand how that influences where extra payments should be prioritized.

If your debt is complex, or if you find it difficult to manage, it would be worth it to seek professional financial advice.

Choose the Budgeting Method that Suits You Best

Rather than living paycheck to paycheck and saving whatever is leftover, they sit down at the beginning of the month to create a Monthly Budget and make decisions about how their money will be distributed. This is how they pay off their debt, save money, and take care of their discretionary spending.

They may find that one area of spending, such as restaurants, has exceeded the amount planned in their Monthly Budget. Rather than throwing in the towel or completely redoing the budget, they adjust the restaurant spending amount for the rest of the month and continue following their overall plan.

If you use spreadsheets begrudgingly, they won’t help you if you don’t use them.

A system that helps you check your account balance is better than nothing, even if it’s just an app.

Regularly Access Your Budget Throughout the Month

Your budget should not be something that you use to plan and then forget about.

Take time to see how you are spending throughout the month. If, for example, you spent almost all of your allocated spending money, you can make adjustments before the problem gets out of hand.

You don’t want to find yourself at the end of the month with large overspending.

It is okay to check the budget frequently, but simplified systems are best. A check-in once a week may be sufficient.

It’s Okay to Have a Bad Month

Rather than living paycheck to paycheck and saving whatever is leftover, they sit down at the beginning of the month to create a Monthly Budget and make decisions about how their money will be distributed. This is how they pay off their debt, save money, and take care of their discretionary spending.

They may find that one area of spending, such as restaurants, has exceeded the amount planned in their Monthly Budget. Rather than throwing in the towel or completely redoing the budget, they adjust the restaurant spending amount for the rest of the month and continue following their overall plan.

The goal when reviewing your budget is to recognize the unexpected and learn how to better predict next month’s spending. Grocery spending that goes above your expectations should not lead to you explaining why you didn’t meet a self-imposed goal. Adjust your budget instead.

A budget should change with you.

Evaluate Your Budget Before Making a Purchase

The best time to evaluate your budget is before making a purchase.

Considering a purchase of a new, expensive gadget? Check your savings goal, upcoming expenses and if necessary, move a payment that wouldn’t be considered a priority to this month.

You may purchase the gadget. You may decide that purchasing the gadget would impact something that is more important.

Keep Your Budgeting Process Simple

The best budgeting system is the one you’ll continue to use in the long term.

There is no point in having a detailed budget you are not going to use. An hour long budgeting session is not sustainable. A budget that takes a few minutes to do by looking at your transactions and updating your budgeting categories is much more likely to stick.

Start simple, then add more detail in the future as you see you need it.

A Simple Example

Imagine you have a household member that earns a consistent income of $3,000 per month. They have fixed expenses regarding housing and utilities, transport, food, and debt that need to be paid. They’re also needing to put money aside to pay off debt and save.

Rather than living paycheck to paycheck and saving whatever is leftover, they sit down at the beginning of the month to create a Monthly Budget and make decisions about how their money will be distributed. This is how they pay off their debt, save money, and take care of their discretionary spending.

They may find that one area of spending, such as restaurants, has exceeded the amount planned in their Monthly Budget. Rather than throwing in the towel or completely redoing the budget, they adjust the restaurant spending amount for the rest of the month and continue following their overall plan.

This is what a budget looks like: it’s a framework for making decisions. It’s not intended to be a means of punishment.

A budget won’t have to be complicated. There’s no need to use complicated financial software or have dozens of spending categories. The first step is understanding your savings and fixed costs, then tracking what you spend. Then assign a purpose to savings, and budget for irregular expenses and personal spending to cater the budget to your monthly spending.

This is the secret of budgets: My first budget wasn’t perfect, but it helped me make so many better decisions. This was more important than achieving the perfect budget so that I could save so much money.

I have some answers to your budgeting questions. First, it’s best to create a budget in order from largest to smallest. For instance, start with your monthly take-home pay. Then, think about the bills that you can’t escape and estimate how you will spend money in each expense category. Finally, see how you actually spend money and adjust your categories based on what you have been buying.

Second, you can keep your budget as simple as you’d like. I like to keep track of my expenditures in broad categories because it’s easy and helpful for quick self checks. However, if you’d like more detail, you can certainly do that.

Third, you should definitely include savings in your budget! Having “savings” as a target expense is helpful because it’s reasoning to save at the beginning of the month instead of the tendency to save whatever is left at the end of the month.

Fourth, don’t worry about it if you go over budget in one of your expense categories. Was it a true surprise? It happens. Make sure that you adjust your budget in that category for the following months to avoid overspending in that category again.

Finally, having a budget is helpful for everyone, no matter your income. Budgets create order, and help you figure out how you should allocate your money to reach certain long-term or short-term financial goals.

I’m not just saying budgets are helpful for people with limited income!

Budgeting apps can be nice tools, but they aren’t necessary. As long as you can maintain consistency with your budgeting, the tools that you use become less important. A budgeting system that you created yourself is probably the better option, and spreadsheets, notes, banking apps, and even a pen and paper are feasible budgeting tools.