Step 1: Keep Track of Expenses
Start by keeping a “Money Diary”. This doesn’t even necessarily require you to meticulously keep track of all your checks and receipts; just carry around a little notebook and write it down every time you make a purchase. It should look like this:
Food Shopping $68.79
Pilates Class $50.00
This is similar to what a nutritionist would tell you if you wanted to start eating better—the first step is just to recognize patterns.
Step 2: Categorize Expenses
Once you’ve been doing this for a month, establish totals on how much money you spent in each category. You might want to categorize your purchases as “Food”, “Exercise”, “Leisure”, “Gifts”, etc. Use these totals to establish about how much money you’ll need for each category on a monthly basis, but leave out expenses marked as “Leisure”. Your leisure budget will be established at the end. Also try to see where things can be cut out: Do you really need to spend $300 on coffee and desserts every month?
Step 3: Consider Recurring Expenses
In this step, look at any monthly bills you pay (rent/mortgage, cell phone bills, internet, car insurance, gym membership, etc.). Be sure to account for everything from your major expenses, all the way down to something as small as your Netflix subscription. Add up all of these recurring bills.
Step 4: Factor in Monthly Income
Now that you know how much you spend, it’s time to calculate how much money you have. If you have multiple jobs, add all of them. If your salary changes month by month, try to find an average.
Step 5: Decide How Much to Save
Everyone should be saving something, regardless of income or situation. Your budget will always somehow fit around your savings as long as you consciously establish how much you want to save. Depending on your income, an appropriate goal might be $1,000 or it might be $20, but be sure to set an amount. If you’re trying to save up for a major purpose, check out our savings calculators to see how much you should save every month to reach your goal.
Step 6: The Final Equation
Now you have all the pieces: to finalize your budget, you just need to put them all into one simple equation. It’s pretty intuitive, and it looks like this:
Total Income – Recurring Bills – Totals for each spending category – Savings amount = Amount left to spend
As long as you can do basic math (and we know you can—you just read through an entire article about following a monthly budget, we have faith in your subtraction skills), it’s all very simple. For the following months, pay the bills you need to pay, save what you decided to save, and don’t spend more than your allotted spending amount. You can’t actually spend more than you should on leisure activities, because all of your money has already been accounted for.
And your budget has been created. Congratulations! Now go buy that little notebook and get started.