6 Steps to Calculating Your Monthly Budget
Just like it’s essential to declutter your home and workspaces, it’s also essential to declutter your finances. You want to be able to eliminate wasteful spending. That means subtracting expenses you don’t use (or that you use infrequently). We often generate the most waste from our grocery bills. After trying several food-delivery programs—and ultimately throwing away most of the ingredients—we realized it’s best to shop when needed and not order big loads of perishables in advance. Find out what works for you and stick to it. Every household has its own rhythm. We’ve come up with a simple six-step program for calculating a monthly budget. Scroll through and start to feel financially in control.
This is the awareness stage of the monthly budget process. You want to take a look at what’s going on before you edit and reorganize. It’s important to understand your baseline in order to discover where you can save in the future. Input all of your monthly expenses into a spreadsheet or money-management app like Mint or LearnVest. This is not the time to skimp on the details. You want to spill all of your dirty little money secrets here—every dime you spent on gourmet coffee, impulse buys, takeout, etc. In order to develop a streamlined housing budget you must see where all of your money is going. Chances are that you didn’t realize how much you actually spend on food and drink on a regular basis. You need to understand exactly how much cash is coming in, as well as what’s going out. Figure out how much you bring home per paycheck, after taxes. Know when you get paid and how regularly.
Now it’s time to edit your expenses and align them as close to the 50/20/30 divide as possible. Subscriptions and memberships are some of the most draining expenditures on your credit card bill. When was the last time you used the gym? Your Hulu subscription? What about your Fabletics or any other monthly consumer goods subscription? You may use your subscriptions all of the time, in which case they have value, but most likely you have a few ongoing monthly payables you could do without. Sometimes you can make less-expensive choices such as investing in a set of weights and a jump rope for your home so you can skip bloated gym fees.
After you outline your current outgoing and incoming cash flow, it’s time to categorize your expenses into three general categories. This is where we like to employ Learnvest’s 50/20/30 principle. Fifty percent of your take-home pay every month should go toward your fixed costs. These are your essential expenses like rent or mortgage payments, utilities, groceries, house-cleaning products, parking, and/or daily transportation. Twenty of your take-home pay should go toward financial goals like paying off student debt, keeping an emergency fund, and any other goals you may have (like traveling). The remaining 30% of your take-home pay can go toward lifestyle choices like entertainment, dining out, shopping, home décor, etc. Your current spending habits probably won’t align with this breakdown, but sort your expenses regardless.
Your deep-dive is an extension of your budget edit. Think about your long-term goals and figure out how your short-term choices can help you achieve them. For example, if you want to invest in a quality dining room table or statement accent chairs, start reducing the number of times you eat out per week. If you want to give your kitchen a renovation, put a little more of your lifestyle spending toward your financial goals budget. The deep-dive is all about designing the lifestyle you want, and then strategizing how to get it.
You want to develop a budget that you can realistically live with. Give yourself a trial month or two to see if your new plan works for you. If the going gets tough, put your credit cards away and stick to a cash budget. You will undoubtedly have to adjust your habits—either spending less or making more.
Use LearnVest, Mint, or other personal-finance management tools to stay on top of your spending habits. Keep a financial calendar so you are alerted every time you have a bill due or when you receive a payment. Make sure to pay your rent, mortgage, and any other home fees like HOA dues on time every time so you don’t have to waste money on penalty fees. And enjoy life knowing you are 100% on top of your finances!
Shop our favorite personal-finance apps below.