How To Make A Monthly Budget:

I like to think of the budget as one of the building blocks of a solid financial foundation. Without a budget you don’t know how much money you can comfortably afford to spend. And we all know that spending more then you make lands you in a pile of debt. Debt is not your friend! Fortunately, budgeting is much simpler then you’d think (for the number of Americans that are up to their eyeballs in debt). Here’s the step-by-step process I use to make my monthly budget.

Step 1. Calculate Your Net Income:

Go get those pay stubs and take a look at them. These days, your employer is probably doing all the work for you. Your take home, or Net income, is the amount of money you make after all of your taxes, retirement deductions, health insurance and transportation benefits etc. are deducted from your paycheck. If your employer were paying you cash, your net income is the actual amount of money you have to spend each month. Don’t fool yourself into thinking that you’re actually bringing home your yearly salary divided by 12, Uncle Sam has to get his cut!

Step 2. Calculate Your Fixed Expenses:

Get a piece of paper and write down all of your expenses. This should include every monthly bill that you have to pay including, rent, utilities, student loans, monthly transportation passes etc. Typically these expenses are easy to calculate because they’re roughly the same amount each month. Your expenses line on the budget should NOT include variable spending such as groceries, gifts, entertainment etc. Those are budgeted in Step 4.

Step 3. Calculate Your Irregular Expenses:

Here’s where you should calculate those bills that happen once or twice a year. Think, car registration, dog license, renter’s insurance, blog hosting etc. Once you’ve calculated this total, divide it by 12, and add it to the monthly regular expenses that you calculated in Step 2. I also add bigger events/amounts that I plan to spend into the Irregular expenses category. (Think Christmas and Vacations). Each month you contribute 1/12th of the amount you need for a yearly expense so that you save this amount over time. It’s much nicer then selling your blood to make money when that car insurance bill comes in. Hint: If you’re starting to budget mid-year, or need to pay for something bi-annually, just divide the amount of money you’ll need by the number of months you have to save it.

Step 4. Calculate Your Variable Expenses:

Groceries, haircuts, small gifts, entertainment expenses and the like fall into this category. Depending on the month, this line item in the budget will vary. In December I budget more for groceries and holiday foods. In July I budget extra for gas, so we can drive to the local beaches. Don’t go overboard here! Remember that you’re budgeting a reasonable amount of money, this isn’t a free for all, spendfest. We’re trying to SAVE money. Conversely, don’t underbudget yourself here. If you’re a family of 6 you probably need to budget more then $40 bucks a month, unless you’re a coupon queen, or eating ramen noodles every night

Step 5. Do the Math:

Don’t worry, it’s basic addition and subtraction. Simply add together your Variable Expenses, Irregular Expenses, and Fixed Expenses from Steps 2, 3 & 4 and subtract that sum (your total expenses) from your Net Income in Step 1. This is the amount you have left over, after you pay all of your bills and account for all of your expenses.

Step 6. Save the “Leftovers”:

Many people spend the difference between their income and their expenses each month. Bad, bad, bad! You’re probably reading how to budget your money because you want to learn how to save money, right? Have your “leftovers” immediately deducted to your savings account. I have used HSBC’s online savings account for the last 3 years. I chose them because at the time I didn’t have a local HSBC branch nearby and I knew it would take a while to get my money out (making it more difficult to spend). Don’t leave your savings in your checking account, it’s just to tempting (and you won’t many any interest).

Quick Q&A:

Q: Is there a reason you don’t “pay yourself first” before deducting expenses?

A: Yup, because I want to make sure I have enough money to pay my bills first. Once you’re good at keeping under budget it’s easy to “pay yourself first” or have the money you plan to save automatically deducted, but I’d do a trial budget for a few months first, the last thing you need is a bounced check fee when you’re trying to save money.

Q: Isn’t groceries a fixed expense? Why did you put it in variable expenses?

A: The truth of the matter is, you can put any of the expenses in any of the categories, as long as you account for all of them it doesn’t really matter which category you put them in.

Q: Do you track every purchase you make? How do you know you’re not spending more then you budgeted?

A: I use an excel spreadsheet to keep track of everything I buy each month. If you’re not spreadsheet savvy, you can definitely write down each item you buy with a pad and pencil. How you track your expenses doesn’t matter as long as you’re staying on budget. Do what works for you. The more you practice staying on budget the easier it gets.