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Budgeting is the foundation of personal finance. Whether or not you write a personal budget, use a budget spreadsheet, use a budgeting app, or simply keep track in your head — you’re probably already budgeting.

And budgeting is never more important than in your early adult life as you figure out how to stretch a paycheck, pay off debt, and — hopefully — save a little bit, too.

This page will give you the basic tools you’ll need to start budgeting.

What is a Budget, Exactly?

A monthly budget is a plan for how you will allocate income to meet your expenses for a designated month. Some think of budgets as spending constraints, but budgets are better described as “spending plans”. If you budget correctly you will be able to spend money on things you enjoy without worrying about meeting other financial obligations, overdrawing your accounts, or going into credit card debt.

A monthly budget typically consists of a list describing your income sources and expenses. Each description is followed by the amount you project for the amount of the income or expense for the designated month. A monthly budget can be an Excel spreadsheet, managed within a software program like Quicken, or simply jotted on a piece of notebook paper.

Writing Your Budget

A monthly budget is an estimate, but your goal should be to make as educated an estimate as possible. To do this, you will want to collect a month’s worth of pay stubs, bills, and bank statements, if possible.

INCOME

Assuming you are budgeting for an upcoming calendar month, start by looking at your previous month’s take-home pay.

  • If you are paid monthly or semi-monthly, this will be easy.
  • If you are paid every other week, multiply your paycheck by 2.166 to determine your monthly pay.
  • Paid weekly? Multiply your check amounts by 4.333.

Budgeting is a bit trickier if your main source of monthly income varies (if you work variable hours or earn tips), you can average several months of income or estimate based upon experience. But be conservative. In a month’s time you want to have spent less than you planned for in your budget—a difficult goal when you don’t bank as much cash as you thought.

You also want to take other income sources into account.

  • Do you work more than one job?
  • Will you get a bonus next month?
  • Do you pick up odd gigs or sell old stuff from time to time?
  • Do you have any investments paying dividends?

Create entries in your monthly budget for these additional income sources and create a line for your total monthly income. This is the amount you have to spend for the month and the basis for your “spending plan”. You cannot spend more than this in any one month. If you anticipate unusually large expenses next month for which you have money saved (a vacation, for example), consider including the savings you will use to pay for the expense as income. This will allow you to see a more typical monthly spending plan despite the inclusion of a non-monthly expense.

EXPENSES

For your monthly budget to work, your expense projections need to be as accurate as possible. Some expenses, like your rent, car payment, and insurance bill, are simple. From there, it gets trickier.

Chances are your utility bills fluctuate from month to month and how much you spend on groceries, dining out, and clothing may vary drastically. Here’s where having a few bills and bank statements will be useful so you can average several month’s worth of data.

Place each expense on a line and write down the amount next to it. You may find it useful to create categories of expenses like:

  • “Transportation”
  • “Household”
  • “Food”
  • “Entertainment”
  • “Debt”

Consider expenses that may not be monthly, such as clothing or car maintenance. You should still budget for these items. If you allocate money every month for these things, that money will be available when you do need it.

Tracking and estimating your monthly expenses will be harder, but not impossible, if you frequently pay in cash. While cash is a good way to moderate your spending, you need to be diligent about collecting receipts if you want to know where your money went. A new benefit of credit and debit cards now that you can use them virtually everywhere, even for micro payments of just a few dollars, is at the end of the month you get a statement with all of your monthly expenses on one page. If you’re struggling with credit card debt, definitely stick with debit cards or cash. But if you can learn to use a credit card responsibly and pay it off in full each month, I actually think a good credit card can make budgeting easier.

Your Bottom Line

When you have a complete list of your monthly expenses, add them up and subtract the sum from your monthly income. You should have a positive number. No? Uh-oh. If you have been spending according to this budget, you are going into debt. You will need to find out why your expenses exceed your income and find ways to cut your expenses – fast! Look at your list of expenses and separate discretionary spending. This includes entertainment, travel, gifts, and all dining (including lunches!) Most people can cut their monthly expenses significantly by learning to give up small daily expenditures like coffee or snacks.

If your budgeted expenses fall below your income, congratulations! You are successfully living below your means. The question, now, is how to use your extra money. Follow our six steps to financial stability to help you prioritize your money goals.

Finally, Keep It Simple

If you ever want to build wealth and stay out of debt, you have to spend less than you earn. And a budget can ensure that you do that. Still, rigidly tracking every dime you spend is like counting calories — it sounds good in theory, but most of us fail to keep up with it. 

But you can stick with a budget if:

After you get a handle on your budget, you’ll be able to focus on other priorities like getting out of debt, building emergency savings, and begin to save for retirement. They aren’t the most exciting financial goals of your lifetime, but once they are out of the way they provide solid footing for financial security for the rest of your life.

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