How to Create a Monthly Budget
5 Min Read | Published: 9 May 2024
Written by American Express
Creating and following a monthly budget doesn’t have to be difficult or disheartening. It all comes down to finding the right approach for you.
Here we outline how to track spending, how to create a monthly budget, and cover tactics you can use to achieve financial security.
Do you want to purchase a home, clear debt or go on a nice holiday? A great place to start when creating a monthly budget is to write down your immediate, middle and long-term financial goals.
An immediate goal is something you’d like to do soon, in the next month or so. This could be going to an event or buying a new pair of shoes. Middle and long-term goals are things you’ll need to save for over months or years, such as trips aboard or large purchases.
This step is especially helpful if you struggle to follow a monthly budget. Writing down your goals reminds you that a monthly budget doesn’t prevent you from having the things you want. Rather, it helps you to create the life you want.
Once you’re clear on your goals, you’re likely to feel more motivated to create and follow a road map, or your monthly budget, for achieving them.
Figuring out your monthly expenses is key to creating your monthly budget.
Start by tallying up your non-negotiable expenses, including:
- Living costs, such as rent or mortgage payments
- Utilities, including water, gas, electric, council tax, internet, TV and phone
- Transportation costs, such as a car payment, petrol or public transport costs
- Insurance costs, from car and life insurance to homeowners’ coverage
- Food expenses, from your weekly grocery shopping to buying lunch during your work break
- Any childcare costs you may have, from nursery fees to breakfast or after school clubs
- Minimum credit card payments
For this tally, only include monthly spending you can’t avoid.
Next, calculate your ‘wants’, or money you spend each month that is not strictly necessary, but still important to your day-to-day quality of life. This might include things like:
- Food and drink at restaurants or cafes
- Hobbies, such as golfing or swimming
- Membership fees, for example to clubs or gyms
- If you’re a parent, activities or clubs your children are a part of
- Beauty or grooming costs, such as haircuts, colouring or manicures
- Charity donations
Once you have your ‘needs’ and your ‘wants’ separated, you will have a clear picture of your monthly costs.
Take an objective look at your spending habits
Another important piece of the budgeting puzzle is less facts-focused and more emotional: take an honest assessment of how you view money. Are you an emotional spender who treats yourself when something bad or good happens? Do you get a bigger boost when you save your money, or spend it?
There are no wrong answers. This exercise is aimed at helping you become aware of the emotional attachment you have to your finances. Successful budgeting comes down to your habits over an extended period. These habits are often driven by moods and feelings in the moment, as opposed to a number on a spreadsheet. Acknowledging your emotional outlook will ensure you create a budget that considers all factors involved in your spending and saving.
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Track your current monthly spending
On top of the above theoretical idea of your monthly costs, you need to understand your actual monthly spending.
You can do this by looking over bank statements or using budget apps like Emma, Plum or Snoop. These apps pull in data from your banking accounts and categorise it, so you get a clear snapshot of your spending. These apps are all regulated by the Financial Conduct Authority, which you should look for when choosing a weekly budget app.
Martin Lewis, the Money Saving Expert, also has a free to download Budget Planner Spreadsheet. You can use it digitally or print out a hard copy.
Assess your spending for at least a month, but ideally for longer. This time frame will provide an accurate insight into your spending over time. It will highlight costs that come up less often and are easy to overlook in your monthly spending, such as Christmas, family or friends’ birthdays, or seasonal clothes for you or your growing children.
Create your monthly budget
Now you have all the necessary information about your average monthly expenses and spending habits, it’s time to create your budget. One of the most common and simplest budgeting methods is the 50/30/20 approach. To use it, divide your total take home amount into three categories:
- 50% should be allocated to needs
- 30% should be allocated to wants
- 20% should go into savings and debt repayment outside of minimums
With the figures from your monthly needs and wants assessment, you can calculate if your spending aligns with this approach. If it does, great. If not, you will need to adjust your spending, looking for places you can reduce costs.
One way to stay on track with a budget is by using the ‘piggy bank’ method, where you have separate accounts for each category. That means you would have one account for needs, which rent or mortgage payments and utilities are linked to. You then have a second account for wants, and a third for savings and debt repayment.
You can break down your ‘piggy banks’ further, creating separate accounts for smaller wants, such as a holiday fund, saving for a new car or money for spa treatments. This system is a higher tech version of the more traditional ‘envelope’ system, where you place cash in dedicated envelopes for each category. The modern version works well if you set up an automatic transfer of a specific amount into each account every month, ideally a day or two after pay day, to allow for any issues with payments.
A monthly budget is the first step to long-term financial security. Find out more about successful money management here.
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