5 Steps To Creating A Monthly Budget

By: Shannon Stophel, CFP®

Published on: 01/24/2025

January is Financial Wellness Month and marks the start of a new year, so there’s no better time to look at your spending and savings goals. It’s a great time to revisit your budget and make adjustments to ensure you are financially fit for 2025.

Many individuals get overwhelmed when creating and sticking to a budget, and some don’t know where to start. We’re here to make it easy for you with a simple 5-step process you can follow that will help you create and stick to a budget without feeling like you can’t spend your hard-earned money!

5 Steps to Creating a Monthly Budget:

1. Identify your income and expenses
2. Separate your expenses – needs vs. wants
3. Set realistic financial goals
4. Design your budget
5. Put your plan into action and review your budget regularly

Let’s break down each of these steps so you can create a budget that works for you and your goals.

Step 1: Identify Your Income and Expenses

Finding Your After-Tax Income:
When creating a budget that aligns with your goals, it’s important to know what you are actually bringing home and how much you’re truly spending. To do this, start by looking at your after-tax income.

Begin with your gross income—the amount you earn before taxes are deducted. For example, if you make $120,000 a year, your gross income is $10,000 per month. From there, you’ll need to see how much you pay in taxes annually to calculate your net income (after-tax income).

If your employer withholds federal, state, social security, and medicare taxes, you can check a recent pay stub to find your after-tax income before any other deductions like medical or retirement contributions. For example, if you make $10,000 a month but your employer takes out $2,000 in taxes, your net income would be $8,000 per month. This is the figure to base your spending and savings plans on, not the full $10,000, because—just like Benjamin Franklin said—“Nothing is certain except death and taxes.”

Finding Your Expenses:
Now that you know your net income, it’s time to identify your monthly expenses. Start by listing all regular monthly expenses, such as rent, car payments, subscriptions (Netflix, Hulu), and autopay items from your bank or credit card.

Then, think about less frequent expenses—those that come up annually or every six months, like car insurance or property taxes. For these, it’s helpful to break them down into monthly amounts. For example:

Example: Car Insurance
Let’s say your car insurance costs $1,200 every 6 months, but you don’t want to get caught off guard when the payment is due. To make this more manageable, divide the amount by 6 months, which comes to $200 per month. Now, you can treat the $1,200 semi-annual payment as a monthly expense, making it easier to plan for.

Action Step: Write down all non-monthly expenses and calculate the monthly cost for each one. Once you’ve done that, add these to your monthly expenses list.

The goal is to have fewer expenses than your monthly income, leaving you with some flexibility to save or spend on other priorities.

Step 2: Separate Your Needs vs. Wants

Now that you’ve calculated your monthly expenses, it’s time to determine what counts as a need versus a want. A need is something essential for survival—like rent or a car payment. A want, on the other hand, is something non-essential that brings you joy, like a Netflix subscription or regular nail appointments.

Review your list of expenses and categorize each item as a need or a want. You may be surprised by how many wants you have!

Remember, having wants in your budget isn’t a bad thing—it’s a normal part of life. However, getting familiar with where your money is going can help you identify areas where you might be able to cut back without sacrificing joy.

By identifying your wants versus your needs, you can prioritize spending and saving to help you reach your goals. Financial decisions, like everything in life, involve trade-offs. For example, if you wake up at 5 a.m. to work out, you’re sacrificing 1-3 hours of sleep to prioritize your fitness—this is called opportunity cost. Similarly, with your finances, every dollar you spend today is a dollar that’s not saved for the future. So, separating needs from wants helps you manage your limited resources effectively.

Step 3: Set Realistic Financial Goals

We’ve all heard about unrealistic New Year’s resolutions. Studies show 88% of people fail to meet their resolutions within the first 2 weeks, often because their goals are too extreme. The same is true for financial goals. Long-term financial success is achieved through small, consistent actions, not big, one-time efforts.

For example, if you’ve never saved for retirement before, setting a goal to save 50% of your income might be too ambitious. Instead, start with 5% or 10% and gradually increase the amount over time.

Realistic goals to get you started:

Build an emergency fund (3-6 months of expenses)
Contribute to your employer-sponsored retirement plan, especially if your employer matches contributions
Start saving for a Roth IRA and work towards maxing it out
Pay off high-interest debt, such as credit cards
Reduce dining out and cook at home more often to save on food costs
If you’re overspending, review your expenses and eliminate unnecessary wants

These goals will help you create a personalized plan based on your situation.

Step 4: Design Your Budget

Now that you’ve identified your income, expenses, and goals, it’s time to design your budget. At this point, creating the budget should feel easy since you already have a clear picture of where your money is going. Your budget will act as the guardrails for your spending and saving.

If you need more structure, consider using the 50/30/20 rule:

50% of after-tax income goes to needs (rent, gas, groceries, etc.)
30% goes to wants (entertainment, travel, dining out, etc.)
20% goes to savings (retirement, emergency fund, future purchases)

This simple rule helps ensure you’re living within your means while saving for the future.

Pro Tip: Set up automatic transfers for savings. As soon as your paycheck hits your account, have the savings portion automatically transferred into your investment accounts. This makes saving effortless!

Step 5: Put Your Plan Into Action and Review Regularly

Once your budget is set, it’s crucial to review it regularly. Life happens, and unexpected expenses may arise. However, constant monitoring can help you spot gaps and adjust accordingly.

For example, you may find an extra $500 in your budget that you were previously spending on non-essentials. Instead of overspending, you can allocate this money toward retirement savings (e.g., a Roth IRA or Traditional IRA).

The key is to stay aware of where your money is going so you can achieve your financial goals. After all, that’s why you put a budget in place in the first place!