If you’re aiming to take control of your finances, avoid financial stress, or work towards a savings goal, then budgeting is the key. By planning how you spend, save, and invest each month, you can make your money work for you instead of feeling like you’re constantly chasing after it. Here’s a practical guide on how to budget that will empower you to make informed financial decisions, stay on top of your finances, and plan for the future.
Practical steps on how to budget your monthly income:
- Calculate your monthly income
- Track your spending
- Set your financial goals
- Choose a budgeting method
- Create your monthly budget
- Review, track and adjust regularly
- Build your emergency fund
- Work on debt reduction and savings
1. Calculate your monthly income
The first step in budgeting is knowing your starting point: your income. If you have a salary then it’s straightforward—just use your monthly take-home pay. If you have multiple sources of income or work freelance, list all income streams and use the average from the last three months to create an estimate. Knowing exactly what you’re working with makes planning more effective. Remember:
- Net income: Always use your take-home pay, i.e., what you get after taxes, deductions, and insurance.
- Other income sources: Include side gigs, freelance work, or investment income.
- Average it out: If your income varies, calculate an average to keep your budgeting realistic based on the last three months.
2. Track your spending
Understanding your spending habits is essential to budgeting. To get a clear picture of where your money is going, track your expenses for at least one month. This exercise helps you identify spending patterns, uncover potential problem areas, and discover opportunities to save. Use a budgeting app, a spreadsheet, or a simple notebook to log every expense. Splitting your expenses into the following categories can help:
- Fixed Expenses: Bills that are the same each month, like rent, utilities, car payments, and insurance.
- Variable Expenses: These change each month, such as groceries and transport. Use averages from the last three months.
- Discretionary Spending: These are non-essential expenses, like eating out, subscriptions, and hobbies. It’s easiest to save money by cutting back on these.
3. Set your financial goals
Having clear financial goals gives purpose to your budget. Whether it’s building an emergency fund, saving for a vacation, paying off debt, or investing, defining what you want to achieve will guide your spending decisions and keep you motivated. Here are some reasons why you might be saving:
- Short-term goals: These are goals you want to achieve within a year, like building a small emergency fund.
- Medium-term goals: Goals that span 1-5 years, such as buying a car or planning a wedding.
- Long-term goals: Goals that extend beyond five years, like saving for retirement or a home. Check out my blog post on saving for long term investments.
4. Choose a budgeting method
Different budgeting methods work for different lifestyles. Here are three popular approaches:
- 50/30/20 Rule: Allocate 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment. This is a straightforward way to divide income but may need adjustments based on your expenses. This is my personal favourite!
- Zero-Based Budget: This means your income minus expenses should equal zero and ensures every penny is accounted for.
- Envelope System: A cash-based system that works well for managing discretionary spending. Withdraw cash for each spending category, and when the cash is gone, you stop spending in that category for the month.
Choose the method that best fits your financial situation and preferences. Many people find success by combining techniques, like using the 50/30/20 rule alongside the envelope system for specific categories.
5. Create your monthly budget
Once you’ve chosen a budgeting method, the next step is putting it into action. One powerful way to ensure you stick to your budget is to automate as many payments as possible.
Automated transfers can make budgeting a low-maintenance process, ensuring that money for essentials, savings, and debt repayment goes exactly where it needs to without you having to lift a finger each month. Set up automatic transfers soon after payday so your budgeting becomes a “set it and forget it” system.
6. Review, track and adjust regularly
Reviewing, tracking, and adjusting your monthly budget regularly is essential for success. Life changes—unexpected expenses, fluctuating income, or new financial goals—can all affect your budget, making it necessary to stay flexible and responsive.
Regularly reviewing your spending against your budgeted amounts can reveal areas where you might be overspending or where you have room to save more. It’s a good idea to reassess at least once a month, making small adjustments to keep your finances aligned with your needs.
If you notice certain categories consistently going over budget, consider increasing their allocations or finding ways to cut costs in other areas. By keeping your budget dynamic and responsive, you can ensure that it remains a tool for financial empowerment rather than a restrictive guideline. Adjusting as needed allows you to stay on track and meet your goals without feeling constrained by a rigid plan.
7. Build your emergency fund
Building an emergency fund is one of the most important steps toward financial security and peace of mind. An emergency fund serves as a safety net, covering unexpected expenses like car repairs or temporary loss of income without forcing you into debt.
Financial experts generally recommend setting aside enough to cover 3-6 months’ worth of living expenses, but if that seems daunting, start small and build gradually.
8. Work on debt reductions and savings
Incorporating debt reduction and savings goals into your budget is essential for achieving long-term financial health. Paying down debt quickly minimizes interest costs, freeing up more money each month to allocate toward other goals.
Start by listing all your debts, including credit cards, loans, and any other outstanding balances. Consider focusing first on high-interest debts through methods like the avalanche approach, which tackles your highest-interest debt first, or the snowball approach, which eliminates smaller balances to create motivation.
Final thoughts..
Budgeting your monthly income is more than just a financial exercise; it’s a way to take control of your money, reduce stress, and build a life aligned with your goals. By consistently tracking, adjusting, and prioritising where your money goes, you can meet both short-term needs and long-term aspirations. Setting up automated payments, monitoring spending habits, and balancing debt reduction with savings helps you stay on course, even when life throws unexpected expenses your way. Remember, a budget is a tool for empowerment—not restriction—giving you the freedom to spend mindfully, plan confidently, and feel prepared for the future. With each month, as your financial skills grow and your goals come within reach, you’ll be well on your way to lasting financial wellness.
