• Creating a monthly budget will help you stick to a consistent spending pattern that sets you up for long-term financial freedom.
• Learn about the basics of budgeting via our easy-to-follow example.
• Read through our budgeting best practices and some of the most common pitfalls to avoid as you build your budgeting proficiency.

Some people cringe when they hear the word “budget.” They think that it means restriction and “financial dieting.”

We like to think of budgeting as a one-way ticket to new financial freedoms. If you can use a calculator, you can create a fantastic budget and become the boss of your finances.

What is a Budget?

Think of a budget as an income and spending plan. A well-constructed budget shows where your money comes from and where it goes using categories. Popular budget categories include housing, utilities, groceries, restaurants, transportation, medical, education, entertainment, clothes, and a catchall “other” category for anything extra. It’s customizable, depending on your lifestyle.

Your monthly budget doesn’t restrict you from spending more or less in certain areas. You choose how much to allocate to each budget category. Setting spending limits for each category removes the guesswork and helps you safely spend in those areas without exceeding your limits.

Think of your monthly budget as giving yourself permission to spend in each area. If you feel wary whenever you want to buy something but aren’t sure if your account balance can sustain the purchase, a budget just might be the missing link to help you feel empowered again.

Why Everyone Needs a Budget

There are many stories about people who win the lottery or come into a large inheritance only to burn through it quickly on luxuries. Why does this happen? Many people who come into a large amount of money quickly don’t plan for the long term.

Even highly paid athletes, movie stars, and musicians need to stick to a budget if they want lifelong financial stability. Without budgeting and savings, a high income today doesn’t guarantee wealth in the future. A monthly budget can help you stick to a consistent spending pattern that sets you up for success down the road.

5 Steps to an Actionable Budget

Let’s consider the steps involved in creating a monthly budget:

Step 1: Calculate Your Net Monthly Income

The first step in putting together your budget is calculating your net income (this is often referred to as take-home pay.)

To calculate your net monthly income, take your total monthly wages or salary and subtract your taxes and any employer-provided programs, such as health insurance and retirement plans.

Step 2: Track Your Spending

Now that you have a clear idea of how much money you’re bringing in, you need to figure out how you’re spending it. Start by writing down your regular fixed expenses, such as rent and car payments. Next, list your variable expenses – these are expenses that change from month to month, like gas, groceries, utilities, and entertainment.

A great way to save time is to see if your bank gives you high-level insights into your spending. When you link your bank to your Payactiv account in the free Payactiv app, SmartSpend tracks your purchases and categorizes them automatically. The app even suggests safe spending limits based on your upcoming bills.

Step 3: Set Short and Long-term Goals

Next, it’s time to make a list of your short and long-term financial goals. Short-term goals are objectives you’re looking to achieve within a one-to-three-year timeframe. Short-term financial goals include things like setting up an emergency fund and paying off your credit card debts.

Long-term financial goals might take many years or even decades to achieve. These goals might include saving for your children’s education or putting money aside for a comfortable retirement.

Step 4: Stick to Your Plan & Save

The next step is to find practical ways to redirect a portion of your money into savings so you can advance toward achieving your financial goals. One way to do this is to reduce your variable expenses, for example, by walking or cycling to work instead of taking the bus or train. You could also shop around for better rates on auto or homeowners insurance.

Another option is to contact your bank and set up an automatic savings plan and add this to the “expenses” portion of your budget.

Step 5: Review Your Budget Regularly

Once you’ve set your budget, it’s vital that you review it and your spending patterns regularly to make sure you’re staying on track. In addition, you may want to adjust some of your goals from time to time. For example, if you get a raise, you might be able to increase the amount you put into savings every month. Once you achieve one of your short-term goals, you may want to set a new one.

Basic Budget Example

The best way to understand a budget is to see one in action. Here’s an example budget you can use to get an understanding of what’s in a typical household monthly spending plan:

As you can see, needs like housing, groceries, and utilities may have a very specific budget allocation. You have more room to adjust wants like restaurant visits and entertainment.

Most importantly, your total spending should be less than your total income. If you spend less than you earn and save the rest, you’re able to make progress toward your financial goals.

Tip: Some people prefer to use cash! With an envelope budget, you put money into envelopes dedicated to each budget category. When the money in an envelope runs out, you’re done spending in that category until the envelope is replenished the next month.

Common Budgeting Mistakes

As you can see, setting a budget isn’t all that difficult, but there are a few pitfalls to avoid. Let’s consider some of the most common budgeting missteps:

Budgeting on Your Gross Pay

If you base your budget on your gross pay (the amount you make before taxes and employer deductions), you’ll think you have more cash in your budget than you actually do. Be sure to budget using your monthly after-tax income.

Using Ballpark Figures

If you’re new at budgeting, coming up with accurate figures for all your monthly expenses can take some time. While fixed costs such as rent are easy to pinpoint, variable expenses such as groceries are more difficult to track precisely, and you might be tempted just to take a guess. However, estimating your expenses puts you at risk of budgeting failure.

Set time aside to review your bank and credit card statements and tally up each and every transaction over the period of a few months to ensure you have a clear and accurate picture of your expenditure.

Passive Spending

It’s very easy to sign up for small, recurring expenses such as subscriptions and then forget to include them in your list of monthly expenses. These kinds of payments can add up quickly!

Ask yourself which of these services you really use and which you could happily do without. Eliminating some of these expenses can provide significant financial relief over time.

Being Too Restrictive

Cutting back drastically on your discretionary spending is sometimes necessary if you’re experiencing a financial emergency or drowning in debt. However, following an overly restrictive budget isn’t sustainable for most people. In fact, it can ultimately drive some people to give up and indulge in overspending. Try to set realistic saving and spending goals that allow you to live within your means but also treat yourself now and again.

Not Saving for Emergencies

Emergencies are an inevitable part of life, and they often bring unwelcome expenses. When they strike, having a few hundred dollars set aside to deal with them could mean the difference between living comfortably and having to make difficult sacrifices to deal with the situation.

So, be sure to include some breathing room into your budget in the form of an emergency fund. Most experts recommend you set aside enough to cover three to six months of your typical living expenses.

Not Working as a Team with Your Spouse or Partner

If you’re single, budgeting for yourself is pretty straightforward. However, budgeting as a couple can be tricky. It’s easy for communication gaps to creep in that result in one party overspending. This can lead to stress and interpersonal conflict. Ideally, you should set time aside at least once a month to sit down with your significant other to discuss your budget for upcoming pay periods.

Trying to Keep Up with the Joneses

It can be hard to stick to your budget if you have close friends that often eat out at expensive restaurants and always seem to have plenty of cash to spend on luxuries. What can you do if you want to save money but also don’t want to be left out of all the fun? The best approach is to speak to your friends honestly about your money concerns and budgeting plans. If they truly care about you, they’ll support you and be open to spending time with you doing things that don’t cost a lot of money, for example, getting together for a cookout or picnic.

Not Having a Budget at All

Of all the potential budget blunders, not having a budget at all is the worst! Making a budget might seem a little intimidating, but finding yourself in crippling debt will be infinitely scarier.

You’re the Boss of Your Budget

Budgeting and thinking about money topics can feel overwhelming, making it a task that’s easy to put off for another time. But looking the other way for too long can have serious consequences for you and your wallet.

The only way to improve your personal finances is to actively manage your income and expenses every month. When you manage your budget like a boss, you’re in the driver’s seat of your finances and not the other way around.

Today, there are many online systems and customizable apps that can help you budget and track your spending to keep you moving in the right direction financially. Many of these are free or are available at a low cost and accessible via your smartphone.

That being said, beware of scams or shady providers that might use your personal and financial information and data to defraud you. Be sure to do your homework before signing up or hitting the download button.

Let Payactiv Help You Track Your Budget

Payactiv’s Earned Wage Access (EWA) services and financial wellness tools can go a long way to putting you on the path to financial freedom.

EWA allows you to access the money you’ve already earned in several ways: Your funds can be loaded onto a debit or prepaid card, transferred to your bank account, or even picked up as cash at Walmart. You can even use your earned wages to pay for Uber rides or Amazon purchases directly via an app on your smartphone.

The Payactiv app helps you build your financial muscles while removing some of the more tedious steps of budgeting. Link your existing bank account to automatically track your spending and set money aside. This will help you save time while creating a deeper understanding of your finances so you can make smarter financial decisions for yourself and your family.

Learn more about how Payactiv can help you advance toward financial freedom.

All content provided on Payactiv.com/blog/ is for informational purposes only. Payactiv makes no representations as to the accuracy or completeness of any information on this site or found by following any link from this site. Payactiv will not be liable for any errors or omissions in this information nor for the availability of this information. Payactiv will not be liable for any losses, injuries, or damages from the display or use of this information.1 Many (but not all) employers, government benefits providers, and other originators send direct deposits early with an effective date of 1-2 days later. Beginning with your second direct deposit of at least $5 from the same source, Central Bank of Kansas City (CBKC) will post the funds to your Payactiv Visa Card when we receive it, rather than on the effective date. This may result in your having access to the funds sooner. The date CBKC receives your direct deposit and the effective date are controlled by the originator.