Last Updated on October 7, 2020 by Early retired mom
In this post you’re going to learn exactly how to develop a personal monthly budget in an easy step-by-step process.
This guide also includes lots of:
- Planning financial goals and most importantly, prioritizing them.
- Set up your first budget
- How to live with a budget
- Find the budget system that works for you
- A free printable budget planner and personal financial goals worksheet
- Lots more
So if you want to get out of debt and start your journey towards financial freedom, you’ll love this guide.
Let’s get started.
Debt.com surveyed 2,654 people and asked 10 questions relating to their budgeting behavior.
Here are some interesting insight from that survey:
Creating a budget and sticking to it, is probably the ultimate way and the most effective one to manage your money wisely.
Why is it important to create a personal monthly budget?
Following a budget lets you see very clearly how you spend your money.
Once you track your spending, you can be more proactive, take conscious money decisions and keep out of debt.
Another reason is that once you can see how your money is spent, you start developing an appreciation to every penny that goes out of your wallet.
Table of content
- Step 1 – Set up your financial goals
- Step 2 – Detail your spending and monthly income
- Step 3 – Set up a basic budget
- Step 4 – How to live with a budget
- Step 5 – Developing a personal monthly budget that works for you
Let’s dive in.
Step 1 – Planning financial goals
In this step I’ll cover the basics of setting up and planning your financial goals which is the first stage of setting up your monthly budget set up an actionable plan to get there.
First, before we get started, you should know that developing a personal monthly budget should not be a complex or overwhelming task.
It should be simple.
Otherwise, you’ll not be able to stick to it.
Let’s get technical
- Open an Excel or Google sheet page or download the free printable budget planner.
- Open the Personal Financial Goals worksheet and write down what’s important for you. What do you want to do with your money?
Here are just a few examples:
- Create an emergency fund to cover your expenses for 3-6 months.
- Pay your debt, as this is decreasing your net worth. I recommend starting to pay off debt with high and/or variable rates.
- Save for retirement as this is increasing your net worth.
- Pay your bills.
- Kids education
- New home or new real estate
- Start a business
Whatever the reason may be, just write it down.
- Now, next to each line, write the amount of money you’ll need.
- Next, write the date you’ll need this money by.
- And finally, the monthly amount of money you’ll need to save to reach that goal.
It should look like this:
|Goals||Amount Needed||Target Date||Monthly Amount|
|Family vacation||$ 10,000||Aug 2022||$ 360|
|Pay home renovation loan||$ 45,000||Dec 2021||$ 2,370|
|Pay off Mortgage||$ 240,000||Dec 2027||$ 2,670|
When you get your monthly income, you’ll need to divide your money across the different goals.
But how would you know which goals are more important than others? And which ones to start with?
If you are not sure, that’s ok.
You still need to complete another piece of your financial puzzle to get a clear picture of where you stand.
Step 2 – Detail your spending and monthly income
Do you really know where all your monthly income is going to? How do you actually spend your money?
In the US, 32% running out of money before their next paycheck hits, according to a new survey fielded by Salary Finance.
This is a critical step to setting up your budget, so it is important to do it right.
If you already monitor your expenses, that this is really great, and it will be easier for you to get the numbers.
One of the ways to monitor your expenses is either to manually collect receipt and look at your bank statement and credit cards transactions.
However, the best way to track your spending will be to use a budget app for that.
Let’s get technical
- If you monitor your expenses manually, then you need to start putting those actual amounts into a budget category list.
- In the free printable budget planner, I have added most of the common categories. All you need is to fill in your “Actual Monthly Spending (Avg)” amounts:
If possible, it would be great if you can monitor your expenses for the past 3 months. 12 months would be even better as then you’ll see annual charges that needs to be included in the budget.
If you are a fan of numbers, you can fill in the actual numbers per month for the past 12 months, each month in a separate column.
If you have expenses that are only occurring for a few months a year, like car insurance, than you make sure you do not forget about those.
So, by now you have a better understanding on where you stand.
It’s time to pick the to set up your first monthly budget.
Step 3 – Set up a Basic Personal Monthly Budget
This is a preliminary step to building your budget.
This step is divided into 2 simple steps:
- Set up your priorities.
- Set up a monthly budget target for each category
For us to achieve our financial goals, we must first set our priorities.
In the first step, you identified your goals, but you may not know how to prioritize them and knowing which one to tackle first.
Well, just being aware of priorities is important.
Most of us are thinking only about covering our monthly expenses. Focusing only on that, many times, distracts us from the goals and dreams that really matter to us.
So when building a budget make sure to take into account what really matters to you.
You need to set your priorities.
And remember, every family has its own priorities.
One thing to always remember, reaching your financial goals, means that you will have to cut spending somewhere else.
Let’s get technical
1. Set up your priorities
In this step, you’ll go through the budget categories and decide in which ones you can cut down your spending.
If you are already using the free printable budget planner, you should now focus on the “Difficulty level” column.
Now, for each category, decide how difficult it is for you to reduce that spending.
You can pick either “Difficult”, “Easy” or “Do not touch”. Considering of course the amount, you spend today.
At first, you may feel that you are unable to reduce your expenses.
Give it a second glance, and you will find many expense clauses that you will be able to streamline and reduce.
A similar process should be done in the income sections, with one difference – we are not looking for ways to opportunities to increase your monthly income.
I recommend calculating your net worth in the process of defining your financial priorities.
Your net worth, is simple terms, is a calculation of your assets minus your liabilities. The result is a strong indication of your financial health.
Assets include anything you own like your real estate, the cash you have in your account, your savings, etc. While your liabilities are your debt, like mortgage, home loans, student loans, etc.
Knowing your net worth helps your planning of your financial goals and priorities.
Here is a great calculator from NerdWallet to do just that.
2. Set up a personal monthly budget target for each category
In categories where you have decided you can reduce your spending, set a new target amount in the “Monthly target” column, which will be carried over the coming months.
Sum up all your spending and income in the monthly target column.
If your spending is still bigger than your income, start this process again until the monthly budget is balanced.
Now that you’ve built your basic budget, it’s time to understand how to live by it.
Just as important.
We have to remember that many times, building a budget is more than just a technical step-by-step process, it is an emotional one.
To maintain a peaceful home and atmosphere, if you married or live with someone, each of you has to look at where he or she can help cut spending, and not look for where the other person can do it.
Step 4 – How to live with a Personal Budget
Now that your basic personal monthly budget is developed, it’s time to take a breath and learn to manage it on a day-to-day basis.
This is an easy task if you use a budget app.
If you do it manually, it may take more time.
This is where most people quit. As it is a task that requires learning and perseverance.
But despite the challenge, it is worth remembering that the reward for your efforts will be rewarding for you and for your family.
You will gain control over your household spending and achieve your financial goals one by one.
It’s definitely worth your time.
The secret to maintaining a family budget is having an organized process of recording all household expenses and incomes, as well as daily monitoring and control.
Doing so will provide the clarity you need to control your expenses and revenue according to budget.
There are no shortcuts.
That’s why I recommend using an app that connects to your bank account and credit cards. You’ll save precious time.
Let’s get technical
You can use the expense tracker tab in the free printable budget planner to log your spending or use any other registry tool. At the beginning, I recommend doing it daily.
It should look like that:
Add each one of your spending into the expense tracker.
By the end of each week or month, you should look at how you are managing the budget you have built.
The amount you spent during the month for each item should be calculated and compared to the budget.
Then check if there are any sections that require a budget update. If so, do it according to the actual expenses you had.
When updating, remember to make sure you are within budget.
After a month or two of reviewing your budget, you can move on to the next step, where you adjust your budget and learn how you can settle debts or open savings.
I found this really great article on the mistakes to avoid when developing a personal monthly budget. I highly recommend you take a look.
Step 5 – Developing a Household Budget That Works For You
In this step you’ll know how to find the right budget system for you.
Selecting the right budgeting system depends on the type of person you are and on your financial goals.
There are many personal monthly budget systems out there.
Here is a brief overview on the most common one and when to choose one over the other
But it is important to note that there is no right or wrong budgeting system.
It needs to fit you.
You can always adjust the budget and customize it to your needs.
What may work for others may not work for you.
And vice versa.
1. The envelope system
Who is it good for?
If you want to cut spending and you are ok with having a strict system that will not allow you to go over budget, this system is for you.
What is the envelope system?
With this system you divide your money into envelopes for the different categories.
Once you’ve used all the cash in an envelope, you can’t spend anymore in that category until the following month.
You can use leftover cash for paying off your debt saving to putting it into another category.
The idea behind this system is that you see the money you spend, and seeing it goes makes an effect on how you value and perceive your money.
2. 50/30/20 budget
Who is it good for?
This system is good for people who are generally comfortable with their financial situation and looking for simple guidelines for spending.
What is the 50/30/20 budget?
This is considered the most commonly used and simplest system to use.
In this budgeting system, you divide your monthly income into 3 different categories.
Things You Need: 50% – Mandatory expenses
First, half of our income would include our:
- Doctor visits
Things You Want: 30% – Lifestyle
This category includes:
- Dining out
- Non-necessary shopping o
- Cable/satellite TV.
- Holiday gift giving
- Car repair and replacement
Finally, this category includes:
- Repaying debt
- Emergency fund
The idea here is that you allocate money for savings on a monthly basis.
You can play with the percentage amounts.
So for example, if right now you cannot save 20% of your income and live off from 80%.
Reduce it to a percentage that makes sense to your situation and gradually grow your savings to 20%.
Alternatively, if you can live off 70% of your income and save 30%, that’s even better.
So don’t take those numbers as a black and white but more like guidance.
3. Reverse budgeting
Who is it good for?
If you want to focus on increasing your wealth and you do not want to set up budget categories or monitor your expenses, this is the easiest budget system you’ll find.
What is the reverse budgeting system?
Most budgets are built around your expenses.
But in this method, you focus on paying yourself first.
That can include saving goals like retirement, paying off debt.
If you downloaded the free printable budget planner, you’ll find the amount you need to save each month in the financial goals sheet.
All you need to do is figure out how much you need to save each month.
Then make those savings automatic and spend the remaining amount of your income as you please
The thing is, that when people save first, automatically they’ll have they have less money to spend. They tend to use the rest on things they need or value.
4. Zero based budget
Who is it good for?
If you want are ok with putting extra work and invest extra time to track every dollar that you spend. You’ve come to the right place.
This system provides a very detailed view of your spending.
What is the zero based budget system?
Just like with the envelope system, the idea of this budget system is to get zero at the end of the month.
Every dollar has a purpose.
Whether for expenses, savings or paying off debt.
Of course, you should not spend like there is no tomorrow just to get to zero.
It’s really about making sure your money, all of it, goes exactly where you wanted it to go.
To be fully honest, this is my favorite system and it is the one I have been using for years now.
You see, 13 years ago, it allowed to buy my first real estate – a beautiful top floor condo in downtown Toronto. I did that in just 18 months.
This system has proven itself many times along the road. But I love numbers.
You can use my free printable budget planner as a monthly zero based budget template.
If it’s not you, that’s ok.
You can still reach your goals in any other budgeting system you’ll find.
What Do You Think?
I’d like to turn things over to you:
Have you started setting up your first budget?
Which is your favorite budgeting system?
Do you use another system that I did not cover here?
Let me know and leave a comment below.