A monthly budget is one of the most foundational elements of your financial picture. It helps you keep your spending in check while ensuring your financial goals are always front and center.
But creating a monthly budget for the first time can be overwhelming — so much so that you might be putting it off. Luckily, a budget calculator can help do some of the heavy lifting so you can focus on your financial goals.
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Step 1: Calculate Your Monthly Income
Before you can create your spending plan, you have to calculate your monthly income. If you have a regular income that’s the same from one month to the next, this part will be easy — you can simply look at a recent pay stub or bank statement to see what you bring home each month.
Where things start to get tricky is when you have an inconsistent income. In this case, budgeting can be a bit more difficult. After all, how much money should you actually budget with?
There are two strategies you can take here. First, if your income is fairly regular from one month to the next with slight fluctuations, you can budget with your average monthly income. Then, during the months when your income is higher, you can set aside money in savings to use during months when your income is a bit lower.
The other strategy you can use is to budget with your lowest monthly income. Then, during months when your income is higher, you can set aside more for your financial goals.
Step 2: Add Up Your Fixed Expenses
Once you know your monthly income, it’s time to add up your fixed expenses. These expenses include things like:
Rent or mortgage payment
Insurance
Phone and internet
Minimum debt payments
Childcare
These expenses are easy to add up because they don’t change from one month to the next. To figure out what they are, you can simply check a recent bank statement or monthly bill.
Step 3: Estimate Your Variable Expenses
Adding up your variable expenses is a bit more challenging since they can change each month. Your variable expenses include things like:
Groceries
Dining out
Entertainment
Personal care
Household items
Transportation
Hobbies
Medical expenses
The easiest way to estimate these expenses is to go through your last three to six months of bank statements. Then you can calculate your average monthly spending in each category.
If you link your accounts to a financial aggregator like Personal Capital, all of this information is automatically available in one place, categorized and visualized in your Dashboard.
Step 4: Identify Financial Goals
One of the steps that many people forget in creating their monthly budgets — and one of the most important steps — is setting financial goals.
Everyone’s financial goals look different. Yours might include paying off debt, saving for the down payment on a home, or preparing for retirement. Whatever they are, they deserve a spot in your budget to ensure you’re setting aside money each month.
For more help reaching your financial goals, you can use Personal Capital’s Savings Planner, which helps you track your savings progress and reach your goals.
Step 5: Create Your Spending Plan
Once you’ve added up all of your income and expenses and identified your financial goals, it’s time to put it all together into a spending plan.
The challenging part about creating your spending plan is that it might need to look a bit different from your current spending habits. For example, you may find that you need to cut back on some of your variable expenses to make room for additional debt payments or savings.
Step 6: Track Your Spending
Creating your monthly budget is only the first step. It’s just as important to track your progress to ensure you’re sticking to it.
By tracking your spending throughout the month, you can hold yourself accountable to make sure you’re sticking to your spending goals. And if you find that you’re going over budget in certain areas, you can adjust the rest of your budget for the month to make up for it.
Personal Capital’s budgeting tool makes it easy to track your spending, organize expenses by category, and see if you’re on track with your budget.
Step 7: Revise As Needed
Think of your budget as a living document. Over time, your lifestyle and financial goals will change, and your budget should change accordingly. Any time you find that the spending plan you created no longer works for your life, you can revisit it and make any necessary changes.
Being flexible with your budget also helps to ensure that you don’t beat yourself up when things don’t go exactly as planned. Remember, your budget is there to serve you, not the other way around.
What is the 50-30-20 Budget Rule?
If you’re having trouble creating your spending plan, you can turn to popular budgeting methods like the 50-30-20 budget to guide you.
In this method, you assign all of your household income to one of three main categories of expenses:
Needs — The 50-30-20 approach dictates that you devote 50% of your income to this category. Needs are things like housing, utilities, food, clothing, insurance and transportation.
Wants —You’ll devote 30% of your income to this category. Wants are things like entertainment, eating out, vacations, recreation and hobbies, and non-essential items like VR headsets, smartwatches, boats, and the like.
Savings —You’ll devote the remaining 20% of your income to savings. This includes savings to meet both short- and long-term goals. It may also include debt repayment other than a home mortgage, which should be considered housing and included in the needs category.
It can be tough to distinguish between wants and needs, particularly in some categories like clothing or cars. What’s truly necessary?
To help you find the answer for your own needs, you can use online tools to get a holistic view of your overall household finances. Personal Capital’s free tools include a budgeting feature where you can track all of your spending, categorize expenses, and set a monthly limit. Based on this, you can start allocating your income to the three expense categories dictated by the 50-30-20 budget system and make adjustments in order to get the percentages right.
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Personal Capital compensates Erin Gobler (“Author”) for providing the content contained in this blog post. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.
