What is a budget and how to make a personal budget worksheet that works for you?
In this guide, I’ll show you how to make a monthly budget worksheet using my excel budget template, which you can download for free.
Then, I’ll also show you the best budget app to auto track spending, and the six steps you need to take to make your budget worksheet achieve your goals.
What is a Budget
Your personal budget is a plan to manage your money in a way that best meets your goals.
Your personal finance has two challenges. The first challenge tests your ability to manage to spend in order to maximize savings. This is where your budget comes in. Your second challenge tests your ability to allocate your savings into investments.
Let’s master the first challenge so you can make a monthly budget that best meets your financial goals.
A great personal budget does three things:
- Goal Setting: An effective budget helps you establish your personal financial goals. It forces you to articulate what you want.
- Good Decision Making: An effective budget helps you develop good financial habits. Having a budget reveals your spending patterns and helps you make informed decisions.
- Progress Tracking: An effective budget helps you relieve financial anxiety. Having a budget makes talking about money a part of life, no longer a confusing topic to hide from.
A budget will help you understand, control, and manage money so your life is free from financial anxieties. Read on to learn how to make a budget that is personalized to your needs. Even if you have a budget, you’ll learn how to make your budget better today.
How to Make a Budget Worksheet
A budget worksheet starts with one equation with three variables. The three variables are income, expense, and saving. The equation is:
Total Income = Total Expense + Total Savings
This equation is the essence of any budget worksheet. Every month, you’ll use your budget worksheet to balance this equation. The equation is simple but it tells us what a monthly budget should and should not allow:
- Expenses cannot exceed income. A balanced budget worksheet caps how much you can spend by your income. Otherwise your savings go negative and turn into debt. So don’t go into credit card debt to spend money you don’t have. If you don’t have the income to spend today, you can’t afford it, period.
- When expenses go down, savings go up. Expenses on your worksheet are gone forever. But savings become investments, which then becomes income via interests and dividends. To maximize our future income, maximize your savings. I recommend saving at least 50% of your take home income every month.
- The more you can make, the more you can save. Another way to maximizing savings is to increase the income on your budget worksheet. If you are frugal but struggle to save 50% of your income, it’s time to think about making more money! And when you make more money, avoid spending creep by keeping your lifestyle the same.
How to Calculate Income in a Budget Worksheet
The income for your monthly budget worksheet should only include your take home pay for that month. This income excludes taxes, social security deduction, and bonuses. You want to exclude any money that is never going to be yours (taxes and society), and not guaranteed (bonuses). This way, you will always have the expected income to cover your expenses.
Calculating this income is straightforward for people with a steady, salaried job. If your income is unpredictable, estimate what you will receive on average each month and use a conservative number on your budget worksheet. If part of your income is automatically deducted for 401K, it is still part of your income and also counts toward savings on the right side of the equation.
Your bonuses do not appear on the budget worksheet because you should automatically deposit it into an investment account. Do not put your bonus toward any expenses. If you cannot afford that vacation or engagement ring with your regular salary, you cannot afford it, period.
How to Calculate Expenses in a Budget Worksheet
Expenses are complex to track within a monthly budget worksheet because a household can incur over a hundred transactions a month. Using an online tool is the best way to automatically track your spending.
But no matter which expense tracking tool you use, I recommend grouping your expenses into the following categories:
- Fixed Obligations: At least in the short term, these expenses are the least negotiable and nearly impossible to cut from your budget worksheet. This includes rent, utilities, internet, and grocery.
- Variable Obligations: These expenses are largely mandatory and vary from month to month on your budget worksheet. You probably can’t eliminate these expenses entirely. Variable obligations typically include transportation, home maintenance (i.e. new lamp), personal care (i.e. toothpaste or haircut), and healthcare.
- Debt: Debt expenses are the repayments of your loans, from student loans, auto loans, to mortgages and credit card debts. The higher the interest rate on your loan, the more aggressive you should try to erase it from your budget worksheet.
- Quality of Life Optional: These expenses are discretionary but they are considered “good for you.” I’m talking about a gym membership, online learning courses, or a vacation fund to avoid burnout.
- Fun Optional: These expenses are the most discretionary. They tend to be entertainment and social expenses that you can eliminate from your budget worksheet if necessary. For some, these expenses include restaurants and gaming. For others, these expenses include shopping, alcohol, or concerts.
It’s not possible to list out every single expense onto your monthly budget worksheet. So categorize your expenses and track them in categories on your budget worksheet. You can shift certain expenses from one budget category to another, but the categories should stay largely the same. Essentially, you spend money on the things you need (fixed or variable) on the things you want (for fun or for good), and on paying off your loans.
The Best Budget App to Track Expenses
A monthly budget worksheet works best if you combine it with a budget app that automatically track and categorize your expenses. I recommend two budget apps: either YNAB or Personal Capital. Your budget app depends on where you are in life. More specifically, it depends on whether you are in the wealth accumulation phase or debt deduction phase of life.
Personal Capital is your best budget app if you have no concerning debt and your goal is to save for retirement or get rich. Personal Capital is hands down the best budget app to track your net wealth. It also automatically tracks and categorizes your credit and debit card spending. This makes calculating your monthly budget as easy as copy and paste.
YNAB is your best budget app if you are need to get out of debt or build an emergency fund. YNAB has a cult following because it has effectively helped many people to get out of debt and stay out of debt. Check it out yourself and learn the YNAB methods to reduce spendings and save more.
Sample Monthly Budget Worksheet
Below is a sample monthly budget worksheet that illustrates how to make a budget worksheet with income, expenses, and savings.
This budget worksheet belongs to Claire. Claire lives in Pittsburgh and works at a nonprofit. Claire’s monthly budget worksheet has led her to become a Uber driver at night after realizing she needs to make more money. Claire’s monthly budget worksheet has also led Claire to decide to share an apartment with another person in order to achieve saving 50% of her take home pay.
Furthermore, Claire’s guilty pleasure is trying new restaurants with friends. She is able to afford doing that because her other expenses are kept low. While Claire has some student loans, she’s not in a hurry to pay them off because she’s able to consolidate them down to a 3% interest rate.
Check out Claire’s monthly budget below and ask yourself, “what does your monthly budget look like, and how can you make better decisions based on what you see?”
Download: Excel Budget Template
You can make your personal budget worksheet today. Want the sample monthly budget worksheet you saw above? CLICK HERE to download your excel budget template today!
Six Steps to Use Your Budget WorkSheet
Now that we know what is a budget and how to make a budget worksheet, it’s your turn to make your personal monthly budget worksheet using my excel budget template above. Just follow these six steps below:
Step 1. Identify and develop budget goals
A successful budget starts with a personal budget goal. You should have a long-term goal (5 to 10 years) and short-term goals (1 year). Your long-term goals should be bold, so dream big and don’t be afraid to be clear about it. Your short-term goal should be achievable, practical, and clearly communicated to everyone in your household.
Write these goals in your monthly budget worksheet and ask yourself every month, “am I a step closer toward my goals?”
Step 2. Evaluate and record income and expenses
At the beginning of every month, record your incomes and expenses into your budget worksheet.
Use a budget app (Personal Capital or YNAB) to automatically track your expense. Then, record them on your budget worksheet so you can identify trends and changes from month to month.
Step 3. Assign priorities to reduce expenses
Hard things are hard. Your budget worksheet reveals problems and opportunities, but only you can take the action to change.
Think about adjusting your lifestyle in order to reduce your spending or increase your income. Then, take actions to make them come true.
Step 4. Track progress toward achieving your big goals
Aside from learning how to make a budget worksheet, you should also think about how to budget your money effectively. Should you cut cost, make big bets, or aggressively pay off your debt?
A budget decision that is right for one person may be totally wrong for you, and vice versa. If your goal is to eventually make it big in life, you may need to go into debt before you can come out on the other end. And that is okay.
Step 5. Review on a monthly basis
Make it a habit to update your budget worksheet every month. It makes a world of difference to your behavior and psychology toward your personal finance.
Review your monthly budget workhow you did this month, what actions you can take next month, and whether your life is still on track to achieve your 1-year goal.
Step 6. Remain flexible: review and revise.
Life happens and your money goals change with it. It’s okay to reevaluate as your life changes whether your goals still make sense.
If you are not achieving your goals, do not get discouraged. You can consider taking more drastic actions such as operating on a cash-only system for a few weeks. If you think you can go faster, by all means adjust your goals upward!
In this guide, you have learned what is a budget, how to make a budget worksheet using my excel budget template, the best budget app for you, and the six steps to make a monthly budget worksheet realize your 10-year goals. You have all the tools you need, now go out there and be bold, be aggressive, and never stop until you realize your dream.