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Guide to Creating a Monthly Budget (And Sticking to It)


SUMMARY: How much money should you be saving, spending on necessities, and spending on wants? Start by using this guide to a monthly budget.

The first step on the path to a prosperous retirement is to manage the money you have now in order to maximize the money you’ll have later. While this sounds simple, it rarely is. The tedious act of counting all of your dollars and putting some of them aside for the future can seem a daunting task, no matter your financial situation. For some, it’s enough to dissuade them from saving altogether.

But with a few tools and tricks of the trade, you can be well on your way to a healthy monthly budget, with the fortitude to stick to it whether times are rich, or a little lean.

creating a monthly budget

Track your money

Your first order of business is to wrap your mind around one basic ratio—the amount of money coming in versus going out.

Your paycheck is the obvious place to begin, but don’t forget any automatic deductions that you never see, such as health insurance, 401(k) or 403(b), and life insurance. Break those out as their own line items, as they are a key component of your income that goes right into savings. If you supplement your salary by dipping your toes in the “gig economy,” be sure to take out any expenses or taxes that apply.

Now, the less fun part—expenses. Pull together your monthly bills (rent/mortgage, utilities, credit card minimum payments, etc.) Be sure to also include bills that come quarterly or annually (car/renter insurance, registrations, memberships).

At the end of this process, you’ll be left with a real sense of the balance (or lack thereof) between your income and expenses. Your budget’s job is to make sure that there’s enough money coming in to provide for your present needs and future plans.

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Choose a budget plan

There are many schools of thought on how to best organize your personal finances:

50/30/20 budget

The most popular of budgeting options, it involves splitting your money into three buckets: 50 percent for necessities, 30 percent on disposables and 20 percent on savings, investments, and debt.

Necessities usually include rent/mortgage, utilities, groceries, insurance, transportation and child care. Disposables include travel, entertainment and dining out. Some expenses straddle these two categories, such as gym memberships, organic produce and other items that are must-haves for some, but nice-to-have for others.

Zero-Based Budget

Every dollar gets a job—weekly groceries, the electric bill, the flight to your nephew’s bar mitzvah in Minneapolis. This is a fairly flexible option and can be incorporated as a layer on top of other strategies such as 50/30/20.

Envelope System

This is a cash-heavy strategy that is ideal for curbing excess spending. Each expense category gets an envelope with money set aside for that month. Once the envelope runs dry, you’ve maxed out your allotment.

Pay Yourself First

Here, the 50/30/20 strategy is flipped on its head, with saving priorities like an emergency fund or a retirement nest egg put ahead of immediate needs. Whatever’s left after your long-term goals get their attention is then applied to your bills. It requires a fair amount of confidence in your ability to manage these expenses.

Set your savings priorities

Once your immediate bills are covered, there’s a separate to-do list that applies to your savings:

  • Start an emergency fund. Three to six months worth of expenses should be at the ready in an easily accessible checking or savings account.
  • Claim your employer-matched funds. If your company offers—and matches contributions to—a 401(k) or similar retirement plan, be sure to put in the maximum amount allowed in order to claim the full match.
  • Stop debt in its tracks. Next in your sights should be debts with an interest rate at or above 4 percent. Whether you start with the highest interest rate or the smallest balance, debt service is essential to maintaining a healthy credit score and moving toward your financial goals.
  • Open an IRA. This can be a useful supplement to (or replacement for) an employer-sponsored retirement account. Both the standard and Roth versions have their benefits, depending on your anticipated post-retirement financial status.
  • Retirement, retirement, retirement. In addition to the above priorities, you will ideally put 15 to 20 percent of your gross income aside for retirement. If you can’t, then contribute whatever you can now—every dollar matters.

Check in regularly

A monthly budget is never set in stone. Your salary, cost of living, and long-term goals will grow and change over the years. Be sure to regularly check in and tweak as needed.

It can seem overwhelming at first, but commitment to the process will result in less stress and greater financial freedom. There is a wide variety of tools to help you along the way, including our e-book, Your Complete Road Map to Retirement.

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