How to Create a Monthly Budgeting Plan
How to Create a Monthly Budgeting Plan

How to Create a Monthly Budgeting Plan

Setting up a monthly budgeting plan allows you to not only maintain your financial health now, but also to plan ahead.

It can make the difference between blindly drifting from one paycheck to the next with no contingency for unexpected expenses, such as a car repair or a vet’s bill, to taking control of your finances so that you can rest safe in the knowledge that not only can you cover your bills, but you can also add to your dream-plan pot.

The success of a budgeting plan, however, relies on your complete honesty and regularly checking in on your finances.

What Are the Benefits of Budgeting?

If you still have doubts about how budgeting can help you, have a look at these benefits:

Financial Health

A budgeting plan provides you with a snapshot of your current and ongoing financial health.

By noting how much money is coming in and going out each month, whether expected or not, you can begin to build a picture of your financial trajectory.

For instance, are you left with extra cash at the end of each month that you can build into a financial buffer for rainy day expenses? Or are you experiencing an increasing amount of debt with each month that passes?

Spending Habits

If you have unhealthy spending habits, for instance, not covering your bills first before paying for leisure items, a monthly budgeting plan can clarify where the problem lies.

An honest plan will demonstrate exactly where you are spending your money, how much, how regularly and the effect that this is having on your overall financial health.

Once you can see where your wallet is leaking cash, you can begin to repair the damage.

Planning Ahead

Maintaining a budgeting plan allows you to plan ahead financially.

By knowing your income and outgoings for each month, you can build a picture of when you will have sufficient funds to pay for a holiday or a deposit for a new car, for instance.

You can also see which months may be difficult financially and save or reassign money accordingly.

How to Make a Budget Plan

If all that sounds good and you want to set up your own monthly budgeting plan, here are our top tips on how to make a budget:

Step 1. Gather the Right Information

Maintaining a budgeting plan relies on accurate information. Gather together all of the following financial documents, whether in paper form or online:

  • Payslips
  • W-2 and/or 1099 forms
  • Bank statements
  • Investment statements
  • Utility and regular household bills
  • Credit card bills
  • Mortgage and loan statements
  • Receipts from the last three months
  • Information on any other income or expenses

What you need to know is how much money is coming in each month and how much is going out.

This must be based on exact, real-life figures and not simply an estimation.

Step 2. Decide on Your Budgeting Period

Creating a monthly budgeting period is the norm but you may decide that a weekly budgeting plan would be more useful.

This will all depend on your personal circumstances.

Step 3. Calculate Your Net Income

Your net income is the money you receive after all expenses have been subtracted.

If you are employed, this is your take-home pay after your employer has made deductions, such as tax or pension contributions.

For instance:

Monthly pay = $4,000

Net pay (after tax has been deducted by employer) = $3,199

If you are retired and receiving a pension, then your net income is your pension payment after deductions like tax have been made.

If you receive income from self-employment, your net income will be the pay you receive once you have deducted business expenses, but the calculation will depend on exactly how you pay yourself; for instance, business income, dividend or by drawing a salary.

You may receive additional income through investments, a tax refund, coming into an inheritance or selling an item.

However simple or complicated your income situation is, calculate your net income for the first month of your budgeting plan and then build a picture of your net income for future months.

Remember though, that income may vary from month to month.

This is exactly why maintaining a monthly budgeting plan requires that you regularly monitor it.

If you want to know more about calculating your take-home income, read our article on Net Pay.

Step 4. Work Out Your Fixed Expenses

Fixed expenses are the bills that must be paid every month or on a regular basis.

These could include:

  • Mortgage or rent
  • Gas and electricity
  • Water
  • Insurance premiums

Fixed expenses generally remain the same but may change from time to time. For this reason, it is less likely that you can adjust the amount you pay on any of these items, although it is possible, for instance, by changing energy supplier.

Remember that some fixed expenses may be paid quarterly, that is, every three months.

Step 5. Track Spending on Variable Expenses

Variable expenses are costs that may not have to be paid on a regular basis and/or may vary in amount.

Some variable expenses, such as food and travel costs, may be necessities but many will not be.

Variable expenses may include:

  • Groceries
  • Car repairs and maintenance
  • Entertainment

These are often the expenses that you can reduce the cost of or set a budget for.

Step 6. Calculate Income and Expenses

At this point, you should be able to compare your monthly income and expenses figures.

What does that tell you?

  • Do you have more income than expenses each month or most months?
  • Do you have more expenses than income each, most or some months?
  • How much money do you have left over each month?

The result of this calculation will provide a true picture of where you are now and how you can, if necessary, improve that situation.

Step 7. Adjust Spending (If You Have To)

By now, you should have a clear picture of how healthy, or not, your finances are.

If you are happy that you can afford your regular expenses and have sufficient spare money to cover unexpected costs or save for a future purchase then you can congratulate yourself.

If, however, you can see that your finances are struggling or that you are facing a future of debt, this is the time to adjust your spending.

For instance:

  • Can you change your utility suppliers to get a better and less expensive deal?
  • Do you need to cut back on entertainment expenses? Maybe you could set yourself a budget on how much you can spend each month on nights out.
  • Can you spend less on food by drawing up a plan of what you will cook each week so that you know exactly what to buy?
  • Do you need that monthly subscription to books, flowers, wine or clothes? You could cancel it until you are in a better financial situation.
  • Can you switch to a less expensive version of anything you buy on a regular basis?

There will generally be changes you can make to reduce your expenses, even if it is only on a temporary basis.

How to Create a Monthly Budgeting Plan
How to Create a Monthly Budgeting Plan

What to Do With Extra Money?

If after setting up your monthly budgeting plan, your income and expenses leave you with extra money on a regular basis, what exactly can you do with it to improve your financial health even more?

Save It

The obvious choice is to save that money.

While it is always wise to have a financial buffer of at least three months’ pay in case you become unemployed or unable to work in your own business, saving money above that amount is not always the best option.

Check the amount of interest your savings account pays. Is it more than the current level of inflation? If inflation is higher, then your savings will depreciate in value and it may be wiser to invest them.

Invest It

Increasingly, investment is seen as an opportunity to make your money work harder for you.

As with any financial decision, investment must be approached with an awareness of the risk involved.

To find out more about this topic, read our Top 10 Reasons to Invest.

Pay off Debt

What debt do you pay the highest level of interest on? Generally, this will be your credit card or loan debt. Can you pay extra towards this debt each month?

This will not only reduce the level of debt more quickly, but it will also reduce the amount of interest charged each month and improve your credit rating too.

If you have credit card debt, the best option is always to pay it off at the end of each month so that you do not incur any interest.

Set Financial Goals

If you have extra money each month, you might set a financial goal to be mortgage-free within the next five years or build an emergency fund of six months’ pay.

If you need to improve your financial situation and adjust your spending, a relevant financial goal might be:

  • To pay off your credit card debt
  • To reduce your credit card spend and pay off the total debt each month
  • To switch all of your utility suppliers to less expensive contracts
  • To save or invest a certain percentage of your salary

Whether you are in a good place financially or you need to improve your spending habits, setting financial goals can provide both clarity and encouragement.

Monitor and Track

Maintaining a monthly budgeting plan is an ongoing process, rather than a quick fix. It requires that you not only add in your expected figures, but that you also update your plan when you have the actual figures.

Your utility bills may go up in price, unless you can negotiate a better deal. Unexpected events are likely to throw surprise expenses in your path.

After a few months, you will be able to confidently track your financial progress. Are your finances improving or do you need to make adjustments? Can you afford all those presents at Christmas or do you need to start saving now?

A successful budgeting plan is a well-watched one.

How to Make a Budget Plan Spreadsheet

One of the most straightforward ways to record and keep track of your budgeting plan is to use a spreadsheet.

There are various options available, including:

  • Microsoft Excel
  • Google Sheets
  • Apple Numbers
  • LibreOffice Calc
  • Zoho Sheet

Start with a blank spreadsheet. Name and save it.

Next, name each income and expenses category.

  • For income, these could include pay, dividends or rental income

  • For expenses, the categories might be rent, utility bills, insurance, groceries or fuel

You can break any of these categories down into sub-categories, such as splitting utility bills into electricity, gas and water.

What budgeting period do you want to use? Add this to your spreadsheet next. In the example below, a monthly budgeting period has been used.

You may choose to simply record the actual incoming and outgoing figures. This will give you an idea of what has happened in each past month and, using projected figures, you can also look ahead to see how your financial situation will develop.

If you want to set budgets for any of the categories, you may wish to use a budget column, actual column and a third column that shows the difference between these two for each month.

How to Create a Monthly Budgeting Plan
How to Create a Monthly Budgeting Plan

Formulas can save you a lot of time when calculating totals and differences. The spreadsheet software you use will offer information on exactly how to use them.

Now, it is simply a case of adding your income and expenses. It might prove useful to begin with the previous three months. This will give you an indication of your spending habits and financial trajectory. It will also give you a good idea of realistic budgets to set.

You might like to take advantage of the chart function that most modern spreadsheets offer for a visual representation of your financial performance.

Microsoft Excel offers a Money feature that pulls your bank account transactions into your budgeting spreadsheet.

Return to your budgeting plan on a regular basis to monitor your progress, add in actual figures and make changes to your budget levels.

Key Tips for Creating a Budget Plan and Sticking to It

Setting up your monthly budgeting plan is only the beginning. Here are our key tips for not only creating your budget but sticking to it too:

Be Honest

Yes, you may need to enter projected figures to get an idea of at what point you might be able to ease off on paying extra to your mortgage or when you can afford to put a deposit down on that new, dream car.

However, by the end of each month, your budgeting plan should show actual figures.

Equally, your spreadsheet should include every dollar that you spend. Without that information, you will not have a true picture of your financial health.

Regularly Check In With Your Plan

Your budgeting plan will only work well if you regularly revisit it to add actual figures, tweak your budgets and map progress towards your financial goals.

Remember to Record One-Off Expenses

To be a true reflection of your finances, your spreadsheet should include not only your regular expenses but also any one-off costs too.

It might be a piece of furniture, a car or a wedding cake. Whatever it is, record it on your budgeting plan.

Use Cash for Danger Categories

A danger category is an area of spending where either you lose track of how much you spend or you regularly overspend, probably past the budget you have set.

It can be all too easy to do this with a debit or credit card, so limit yourself to paying for these categories with cash only.

First, this will make you aware of how much you have spent. Second, if you limit yourself to the cash that is in your purse or wallet only, then you will have to stop once that money is gone.

Plan Ahead

One of the benefits of using a monthly budgeting plan is that it can provide a likely future view of your financial situation.

If you can see that there is a month coming up where money will be short, plan ahead by saving money to cover the shortfall.

Alternatively, if you know that you want to make a sizeable purchase or will have a big bill to pay, your budgeting plan will show you how much money to put aside to make your purchase (such as a wedding present) or pay that bill (for instance, your self-employed tax).

Remember The ‘Why’

Recording your income and expenses each month can turn into a slog if you forget the reason why you created your budgeting plan in the first place – your financial health and your future.

The specifics of that future will depend on you:

  • Retirement
  • First house purchase
  • Starting a family

Your budgeting plan is just one tool to use to build that future.

Final Thoughts

Like any new habit, maintaining a budgeting plan can be uncomfortable to begin with.

But if you continue to use, monitor and tweak it to fit your circumstances, in no time at all it will become just one more way to guarantee a brighter future.

Read This Next

You might also be interested in these other Wikijob articles:

Or explore the Personal Finance / Saving & Budgeting sections.