How to Make a Monthly Budget

Almost 60% of Americans lack the savings to cover an emergency expense of $1,000 (they happen!), and 80% of the nation struggles with debt.

Given those realities, the value of creating and following a budget has never been clearer. At its most basic, a budget helps ensure you do not spend more than you earn. Creating a budget offers several other positives, including getting out of credit card debt faster, saving for a long-term goal such as a house or retirement, or simply ensuring that you are on solid financial footing to meet whatever curveballs life may throw, so you can avoid living paycheck to paycheck.

Budgeting lets you track the money you make and the money you spend. A good budget includes allocations for expenses and savings and lays out a path for reaching a financial goal. A side benefit of budgeting might be to mitigate disagreements between married couples about money.

Why Budgeting Is Important

The national economy experienced a slight contraction in the first quarter of 2025, and Americans are cutting back on discretionary spending as they try to navigate the uncertainty of tariffs.

Stagnant incomes, growing debt burdens, and rising housing and medical costs are among the reasons so many Americans have looked to tighten their financial belts. The short- and long-term effects of tariffs are also not clear. In times of uncertainty, it’s wise to focus on what you make and what you spend. Learning how to make a monthly budget can be a key step toward solidifying your financial status and future.

Here are just a few of the reasons that creating a household budget is a wise decision, regardless of your financial circumstances:

• It’s a simple and effective way of managing or avoiding debt: The reason millions of Americans find themselves weighed down with hefty interest payments on credit card accounts is that they simply spend more each month than they bring in. The No. 1 budgeting tip: Make sure your monthly spending does not exceed your disposable income.
• It helps achieve short and long-term goals: Say you want to save money for a down payment on a car next year or a home in five years, or that you want to make sure you can spend your golden years in comfort by building up your retirement nest egg. A budget plays a valuable role in determining how much of your income you need to save each month to reach those goals. A budget also can be a way of forcing you to sacrifice – be it cutting back on lattes at coffee shops or meals at restaurants, scaling back on expensive vacations, settling for a cheaper cable or streaming TV package, or holding onto that aging car for a few more years. Finally, a budget can help anticipate expenses like car expenses, utilities, or phone bills.
• It can prepare you for a rainy day: The fact that more than half of Americans live paycheck to paycheck and so worst-casen emergency fund, cries out for the need for more households to build a cushion they can turn to the next time the car breaks down, the home plumbing springs a leak, or, in a worst case scenario, you lose your job or health insurance.
• It encourages you to become invested in your own finances: The process of budgeting instills individuals with the discipline and motivation to manage their finances more efficiently and responsibly. Research has shown that those who adhere to a budget are more likely to reach their financial goals in part because they become emotionally invested in the process.

» Learn More: Budgeting Tips for Families

How to Create a Budget

There is no set, defined method for how to create a budget. The best approach is the best approach for you — whether it’s budgeting apps, programs like Quicken, a budget worksheet such as the one provided by InCharge Debt Solutions,  or an old-fashioned pencil and paper. To help with the math, you can also try InCharge’s budget calculator.

» Learn More:

• Best Money Apps
• Best Budgeting Apps for Couples

No matter the approach, you’ll need to follow some basic steps to make sure you’re creating a clear and accurate picture of your finances.

Step 1: Gather Financial Statements

This is as basic as collecting every document that reflects your monthly income and expenses, including bank, credit card and investment accounts, paycheck stubs, benefits statements, and electronic payments.

The strength of a budget will be determined by how accurate it is. Look at three months of credit card and/or debit card charges to make sure you are capturing all of the categories where you typically spend money.

While some of these income and spending items may vary from month to month, or reflect one-time or irregular transactions, gathering a paper trail is the best way to get a bird’s-eye view of how much money is coming into and leaving your financial house each month.

Then you can start drilling down into the nitty gritty of creating a budget that puts that house on a firm foundation.

» Learn More: Financial Planning Process

Step 2: Calculate Monthly Income

Take-home income is the only income that matters in a budget. Forget about pre-tax earnings. The amount of after-tax money that goes into the bank is what you can spend or save beyond what you may already be putting into a retirement account at work.

When calculating income, also include other sources like social security, disability, pension, child support, regular interest or dividend earnings and alimony. Any money that you regularly receive can be considered income for your monthly budget.

Here’s how to determine what your monthly take-home income is:

If You Are Paid Every Two Weeks: Multiply your take-home pay for one paycheck by 26, which is the number of paychecks in a year. Then divide this number by 12 to get your monthly income.

If You Are Paid Every Week: Take your weekly pay and multiply it by the number of weeks in a year: 52. Divide this number by 12 to get your monthly income.

If Your Pay Fluctuates: If your pay fluctuates based on tips, varying hours, and/or commissions, you can still calculate an estimated monthly income by adding up three months of income and then dividing by three.

» Learn More: How to Budget Money on a Low Income

Step 3: List Monthly Expenses

Once you’ve collected all relevant financial statements and other documents, you’re now in a position to confidently calculate your average monthly expenses, which will include everything from mortgage payments to rent to car loans to utility bills, insurance, prescriptions,  groceries, dining out and student and other loans. Don’t forget to account for irregular bills that you may pay annually or semi-annually, such as property taxes and car registration and insurance fees.

Tracking your spending in different categories can help you get a better sense of which areas are consuming significant chunks of your income. The Consumer Financial Protection Bureau provides a handy spending tracker worksheet to simplify the process.

» Learn More: List of Typical Monthly Expenses

Step 4: Categorize Expenses as Fixed or Variable

Fixed expenses are “needs” as opposed to wants. We need to pay the mortgage, rent, car payment and to buy food. We want to go out to dinner, see a movie, or buy a larger TV.

If an expense is required to live, it’s a fixed expense you must pay. If an expense is something you can do without, it’s a variable expense.

The more your budget is consumed by fixed costs, the less flexibility you will have to make adjustments absent some big lifestyle changes (such as selling your car, taking on a roommate, or moving to a city with a lower cost of living).

Examples of fixed expenses:

• Mortgage/rent
• Car payments
• Car insurance
• Health insurance
• Utility bills
• Internet, TV, and cell phone service

» Learn More:

• How Much Rent Can I Afford?
• How Much Mortgage Can I Afford?

Variable expenses, on the other hand, differ significantly from month to month based on your lifestyle, choices, and spending habits. They therefore can be adjusted more easily and reallocated in your budget depending on your individual goals — whether it’s to pay down debt, save for a big-ticket purchase or build up a rainy-day fund.

Examples of variable expenses: 

• Travel
• Dining
• Gifts
• Entertainment

Step 5: Add Up Income(s) and Expenses Columns

It’s now time to add up each column (income and expense) and hope that the expenses do not exceed the income. If it does, it’s time to make some hard choices about where money is going.

If you’re one of the fortunate ones who make more than you spend, you can now start setting money aside to invest or save.

A hard bottom line is that budgeted expenses should never exceed 90% of your take-home income.

But don’t let the results get you down. You created a budget to understand your spending, and now you’ve done that.

By adding up your income and expenses and seeing where the difference lies, you’ve taken an important step in your financial well-being.

» Learn More: How to Live on One Income

Step 6: Evaluate Results and Adjust Accordingly

Getting a handle on your income and expenses can be eye-opening, humbling, and empowering – all at once.

You may discover that you’re in a better position to save than you had anticipated, and that you have the means to reach that long-term goal of a new home or vacation, or car, or that you’re better able to save for retirement.

Or you may discover that too much of your money is going toward variable expenses like expensive meals, clothes, or shows that you can live without. This provides a reality check; you need to trim back spending to build up a rainy-day fund.

If your fears come true, and you learn that you’ve been living beyond your means, you now have the information to make the choices necessary to repair that crumbling foundation.

Whatever the results, your job now is to create a budget in which the amount you’re setting aside each month for variable and fixed expenses and short- and long-term savings goals matches what you’re bringing home in income.

Start by trimming back variable expenses if you need to. Or by looking for ways to boost your income with a side hustle or a safe investment that pays regular dividends or interest.

If that’s not enough, look for what adjustments are possible to your fixed expenses. Can you shop around for a cheaper auto insurance plan? Cut the cord with your cable TV provider or eliminate unused streaming channels? If necessary, can you downsize to a cheaper home, apartment, or car?

It’s also important to make sure your budget tracks due dates for bills so that you don’t risk missing payments, which will add late charges or other penalties and quickly throw your budget out of whack.

Consider setting up automatic payments for recurring bills and/or incorporating a bill calendar into your budget to keep tabs on due dates and ensure that your income flow is sufficient to cover individual payments each month; the Consumer Financial Protection Bureau provides a sample here.

» Learn More: Budgeting Tips for Beginners

Budgeting Methods

Two fundamental facts are important to creating a budget plan template.

The first is to remember what a budget provides. Basically, figuring out your budget will help ensure you do not spend more than you make. It allows you to understand what money is coming in and what is going out. It can prioritize where the money has to go and where it can go.

How you achieve this financial snapshot via a budget depends on you. There are several systems or methods you can choose when forming a budget. The method you choose is a personal choice. Any method provides important and necessary information.

Let’s look at the ways to create a budget.

50/30/20 Rule

This approach has become more popular in recent years. The 50-30-20 method means budgeting 50% of income for needs, 30% for wants (that new TV perhaps) and 20% for savings and debt repayment.

Your savings should include an emergency fund that can cover at least three months of expenses should you lose your job or suffer another blow to your income.

Of course, most rules come with exceptions, and that is also true with the 50-30-20 model.

For low-income households saddled with debt, it may be necessary to devote a higher percentage of income to “needs” and less to wants and savings, at least temporarily.

Similarly, if more affluent households can afford to squirrel away more than 20% in savings, which might be a better use of income in the long run than buying a new Mercedes, booking that five-star European hotel, or upgrading to a more spacious home.

If you’re already devoting a healthy chunk of your pre-tax income to a 401(k) plan or other employment retirement vehicle, you’ll want to take that into account as well in setting your savings goal.

» Learn More: How Much Should You Save From Each Paycheck?

The 50-30-20 allocation may also need to be adjusted from time to time to account for emergencies or unexpected expenses, such as a roof repair or big medical bills. Though no rule is set in stone, the 50-30-20 model works for many.

Zero-Based Budgeting

This personal budget example means expenses subtracted from income equals zero. If you take home $4,000 per month, zero-based budgeting means expenses are $4,000.

That is the ultimate goal of any budget and reaching that point may take some adjustments in where money is spent.

This approach does not mean no money is saved. Any budget should have a category for savings, both short-term (a new bike, new patio furniture) and long-term (money set aside for a down payment on a house, or a special vacation).

Figuring a zero-based budget happens this way:

• List income. Be sure it’s after-tax income.
• List expenses. Put them in categories and be sure to include necessary expenses that include items such as rent, utilities, transportation, and savings.
• Subtract expenses from income. This likely won’t equal zero on the first try. If there’s money left over, that can be added to savings. If there are more expenses than income, it’s time to adjust the amounts in some categories to bring the total to zero.

Pay-Yourself-First Budgeting

This method requires discipline, and attention to detail. It means putting a priority on saving money before you pay other expenses, no matter if they’re needs or luxuries.

This method means you place a specific percentage of income immediately into savings. You then budget the remainder of your income according to your expenses. For instance, if you take home $4,000 per month and you want to save 15% of your income, you would immediately save $600 and use the remaining $3,400 to pay expenses.

Paying yourself first will help build a nest egg, but it’s not for everyone. Following this plan means having enough income to pay the bills and means you may have to cut back on luxury spending.

Envelope Budgeting

If you need more than just numbers on a page, the budget envelope system is an option. This entails putting the actual amount of cash budgeted for categories in an envelope. Once the envelopes are empty, stop spending in that category. How does this work?

• Create a budget.
• Create envelopes with categories. This can be specific categories like groceries, electric bills, and car payment, or it can be more general like essentials, wants and savings.
• Stop spending when the envelope is empty.

While this approach can work for those who have trouble controlling spending, to many it’s dated. In the digital world, many of us do not use cash and instead rely on bank cards and money transfer apps like Venmo or Apple Cash.

Budgeting Tips

It’s one thing to create a budget, quite another to actually follow it. Following your budget takes discipline, awareness, and (for some) sacrifice. Here’s a few key tips to remember when making a budget:

• Don’t confuse luxuries with necessities. Eating is a necessity. Eating at a four-star restaurant is a luxury. If you have to trim expenses, pare back on the luxuries.
• Watch the small stuff. If you like passing time in coffee shops, add up what you spend each month. The sum of all those $4 lattes might shock you. The average price of making coffee at home is 26 cents. If you’re overspending, make your own coffee.
• Restrain yourself. Just because you earn a raise doesn’t mean you have to find new ways to spend. Consider saving part of it or contributing more to a workplace 401(k) retirement plan.
• Use cash. Credit and debit cards are great conveniences, but also easy to overuse. When you spend cash, or write checks and enter them in a register, you’ll more accurately see what you’re doing with your money. Finally, using cash isn’t an excuse to visit an ATM when you get the urge to spend. Use your budget to set limits on yourself and keep receipts to monitor your progress.
• Manage your own debt. If you have a growing unpaid balance on your credit cards, part of your budget should aim toward bringing the balance to zero. Paying revolving credit card debt (and the interest it accrues) is one of the least useful ways to spend your money.
• If your debt is out of control, consider debt consolidation programs that lower your interest rate and your monthly payment.

» Learn More: How to Lower Your Cell Phone Bill

Budget Calculator

Using a budget calculator can help you quickly add up your income and expenses. InCharge’s online budget calculator will help you capture all of your expenses and assess what income is required to maintain your expenses.

Budget Spreadsheet

A spreadsheet is a good tool to use while budgeting because you can change your assumptions and see how they affect your surplus and/or deficit. A well-designed budget spreadsheet will have formulas pre-programmed to add up your expenses and subtract them from income. You can see how reducing costs 5-to-10% across small areas of your budget adds up to larger savings.

When maintaining a budget spreadsheet, consider having two: one spreadsheet reflecting your actual income and expenses and a duplicate that reflects your goals, which could include expenses you are working on reducing (monthly debt payments, for example) and income opportunities you are working to grow.

Your goal budget can help you visualize the power of savings over time. Remember, any expense you are able to reduce permanently represents recurrent savings.

[Download InCharge’s Budget Spreadsheet]

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Discuss Your Budget with a Credit Counselor

There are plenty of resources available to help you get started with creating and sticking to a budget, but the process can still seem overwhelming, especially for those who are already struggling with debt or other challenges. If that’s the case, free credit counseling like that provided by InCharge Debt Solutions can be the answer.

Credit counselors can provide personalized recommendations on trimming expenses and boosting income in each major budget category, as well as help with debt-relief programs such as a debt management plan or debt consolidation that may be an important component in making your budget work.

A budget can’t work miracles. But it can make a significant difference to your financial health, which will carry over to your emotional and physical health.