If you’re anything like me, you’ve been hit with more $40 overdraft fees for $3 coffee purchases than you care to remember. (Perhaps you’ve even made elaborate plans about exactly what we should do with the greedy CEOs who set such draconian overdraft rules.) 

Whether you’re tired of paying exorbitant overdraft fees, or you simply want to start to build savings for a rainy day or retirement, creating a monthly budget is an important first step. 

The general rule of thumb is that budgets should be calculated monthly (as opposed to bi-weekly or quarterly) since most expenses people deal with occur on a monthly recurring basis. So, making a budget that accounts for all of your expenses monthly will require the least amount of math (yay!) and also cover nearly all of the expenses you can expect to encounter over the course of the year. 

Stick around for a breakdown of exactly how to set a budget that you can stick to. 

1. Calculate your income

Obviously, the first step in understanding how much money you can spend on avocado toast each month is figuring out how much money you have to work with overall, i.e. your total net income. Net income is the amount of money that actually gets deposited into your bank account (or written on your physical paycheck, if you still get one of those archaic things) once they deduct taxes and social security and all that fun stuff. 

This step is fairly simple, especially if you earn consistent income (meaning you get a salary or work pretty much the same hours every week), but even if your income is somewhat erratic, this shouldn’t be too difficult to figure out. 

Lots of companies these days use some sort of software to manage their payroll (like Quickbooks), and employees can easily login to view all of the paychecks they’ve ever earned. If you have access to a system like this, simply log in and open your most recent paycheck: it will tell you exactly what your net income was for that pay cycle. 

If you don’t have an easy-to-use payroll software where you can lookup your paychecks, you have a couple of other options: 

Check your bank statements/app: every deposit made into your account is accounted for in your bank statement, so you can find the most recent payroll deposit there. 

Most banks have convenient apps you can use to look up recent transactions right from your phone, so you actually don’t even need to download a statement to figure this out: simply look for recent transactions on your banking app and you’ll see your payroll deposit there. 

Ask your HR person: if you don’t have a bank with an easy-to-use app (or website) and can’t find the time to get into your actual bank to ask for a statement, ask your HR representative at work. (Believe me, your company knows how much they’re paying you.) This is probably not the most efficient way to get this information, as HR reps tend to have a lot on their plates, so it may take some time for them to actually get you this info. 

       a. If your income is consistent

Congratulations! The mystery of how much money you have to work with this pay cycle will never weigh on your shoulders. Also, calculating your total net income is quite easy. 

Simply multiply the net income from a recent paycheck by the number of pay cycles in the month to figure out your monthly net income. 

(Pay Cycle Net) x (# of Pay Cycles per Month) = Monthly Net

      b. If your income changes

If you work a job that does not have a salary or even relatively consistent hours, you can still get a fairly good estimate of what your monthly net income is. 

You’re still going to need to start with your paycheck. Ideally, you have access to all your pay stubs from the past year. If not, gather as many as you possibly can: the more information you have about how your pay fluctuates throughout the year, the more accurate your calculation of monthly net income will be. 

Having a full 12 months’ of paychecks is especially important if you work a job that has hours or pay scales that change based on the season. A barista, for example, will make more money during the holiday season (thanks to increased tips and holiday pay rates) than they will during other times of the year. 

PRO TIP (pun intended): If you get cash tips and they play an important role in being able to cover your monthly expenses, start recording them. This way, when you go to make a budget next year, you know about how much to expect per month in tips. 

Once you have all of your paychecks together, you’re going to need to calculate your average monthly net. Here’s how: 

  1. Add up the net pay from each of the paychecks you have. 
  2. Divide the total by the number of paychecks you were able to acquire (so, ideally, 24 — two per month for one year). 

[Sum of Pay Cycle Net] / [# of Pay Cycles Considered] = Average Pay Cycle Net

       3. You’ll need to multiply your average pay cycle net by the number of pay cycles in a month (usually 2) in order to figure out your average monthly net. 

[Average Pay Cycle Net] x [# of Pay Cycles per Month] = Average Monthly Net

Knowing how much money you can expect to bring in on average each month isn’t quite as good as knowing exactly, but it’s probably good enough for the purposes of budget planning. 

2. Calculate your expenses

Now that you know how much money gets deposited into your bank account each month, it’s time to figure out how much gets taken out. This step is also going to involve taking a look at your bank account, so if you haven’t downloaded your bank’s app yet, now is a great time. 

a. Recurring expenses

To calculate your monthly recurring expenses, you’ll want to go back and look through the last month of transactions on your account. Recurring expenses are charges that are going to be the same (or about the same) every month of the year — things like your rent or mortgage, cell phone or internet bill, and your Netflix/Hulu/Spotify subscriptions. 

Whether you include your utilities in this section is sort of up to you: if you live somewhere where electric bills get a heck of a lot more expensive in the winter, it might be worth doing a yearly average of that expense specifically. If the charges stay relatively constant, you can go ahead and lump them in here. 

b. Incidental expenses

Any expense that doesn’t recur monthly is going to fall into this category. The first thing you’ll want to do when looking through your bank statement for incidental expenses, is to categorize them further based on what type of thing you’re spending your money on (groceries, dining out, gas, etc.). Lots of banking apps actually do this for you, which is nice. 

If your app doesn’t, here are some basic categories you can use that should cover most of the expenses you’ll find in your statement: 

  • Groceries
  • Gas/Other car expenses
  • Credit card/other debt payments
  • Restaurants/Dining
  • Entertainment (which should probably include alcohol if you’re going out drinking somewhat frequently)
  • Travel
  • Healthcare
  • Miscellaneous 

You should look back at several months to check for incidental expenses, just in case your habits change throughout the year (for example, you won’t go on vacation every month — if you do, you probably don’t need to be reading this — but you want to account for the expense of vacations in your monthly budget so you know you’ll have enough money to go on the next one). I’d recommend looking at at least six months, but obviously the more the merrier. 

At the end of the day, you’re going to calculate a monthly average for each of the categories you decide to use. Here’s the equation: 

[Sum of Category Expenses] / [# of Months Considered] = Monthly Category Average

c. Recurring, non-monthly expenses

Some recurring expenses are billed less often: lots of water bills, for example, are calculated quarterly. It’s worth checking your statement for these expenses just to make sure you aren’t blindsided by a charge that will appear on your account in a month you just happened to not be checking. 

In terms of how to account for quarterly or bi-annually recurring expenses in a monthly budget, simply divide the expense by the number of months it pays for. For example, if your insurance bills you bi-annually and that covers six months of insurance, divide the expense by 6 and add that to your monthly recurring expenses. 

[Expense] / [# of Months Covered] = Monthly Average Expense

d. Savings

If you’re doing adulting right, you’re probably putting some money aside each paycheck for retirement or in case of an emergency. If you are, you’ll want to add that as an expense line in your budget. If the whole reason you’re doing this is to figure out how much you can afford to set aside, we’ll come back to this in a bit. 

3. Easy math, (potentially) hard decisions

Once you have your monthly net income and monthly expenses calculated, you simply deduct the expenses from the income to figure out how much room you have in your budget. 

[Monthly Net Income] – [Total Monthly Expenses] = Budget Surplus or Deficit

If the answer to the equation above is a positive number, great: you have a budget surplus! This means you have some room in your budget to save for retirement or a rainy day. 

If the answer to the equation above is a negative number, then you have a deficit, and you’re going to need to do some reconfiguring of your monthly expenses to avoid being dragged into the cold, murky waters of excessive credit card debt. 

What do I do with my surplus?

Having a surplus in your budget is the ideal scenario here: it means that you’re living within your means and have some wiggle room to save for something special, plan for possible future expenses, or start squirreling money away for retirement. 

Most financial professionals would advise you to start investing any excess money you have for retirement as soon as possible — so this would be a great thing to do with your budget surplus. In terms of exactly how to do that, you should talk to a financial advisor. They’ll be able to recommend the right investment plan for you; one that you can keep up with consistently.

How do I eliminate my deficit?

Lucky for you, eliminating a deficit in a personal budget tends to be a whole heck of a lot easier than doing so at the governmental level. Having said that, you may have to make some difficult choices about your lifestyle. Exactly how you tackle your own budget deficit will probably need to depend on how big the deficit is, and speaking with a financial advisor is probably in your best interest. 

Having said that, here are a few broad-strokes moves you can make to try and get yourself back in the black on a monthly basis:

  • Stop drinking: alcohol tends to be unconscionably expensive, especially if you buy it from a bar or restaurant. If you’re a social drinker and find yourself spending upwards of $50 a night on bar tabs on the weekend, cutting alcohol out will free up a lot of room in your budget. 

If eliminating drinking altogether is too much of a lifestyle shift (or more drastic of a budgetary move than is necessary), you can always make adjustments to how you drink: switching to well drinks, or — even better — drinking at home as opposed to at bars will make it much less expensive to enjoy a few drinks with friends. 

  • Evaluate housing expenses: how much are you paying for rent or your mortgage? Are you overpaying? The general rule of thumb is you shouldn’t be spending more than ⅓ of your income on rent/mortgage per month. Following that rule is getting more and more difficult, but if you’re way overspending on housing, you may want to consider a shift. 
    • Move away from city centers: if you live in a city, your cost of living is likely to be higher. If you wouldn’t mind a bit more of a commute, however, you can reduce housing costs fairly significantly by moving a little bit away from downtown. For example, the average rent for an apartment in Nashville, TN is about $1,800. Rents in Goodlettsville, TN, on the other hand (which is about 20 minutes North of Nashville) average out to about $1,450; that’s $350 per month, which could be the difference between deficit and surplus. 
    • Get some roommates: If you have more house than you maybe need (or can afford) you could consider allowing roommates to move in with you. Of course, if you’re renting you’re going to need to check with your landlord (definitely don’t move people into your apartment without telling your landlord), but if you own your home this is entirely your prerogative. In either case, you should make sure that you properly vet anyone you consider allowing to live with you, and make them sign a lease before giving them a key (you can find free lease templates fairly easily on the internet). 
  • Consolidate debt: if you’re making a lot of different payments to various debts (such as multiple credit cards, car loans, etc.), consolidating your debt might be a good way to lower the amount you need to pay out each month. You may end up spending more in the long run, especially if your credit is not stellar, but it could help prevent you from going further into debt. There are various debt consolidation companies available online, and you can usually find out what your rate would be without having a hard check on your credit. 
  • Cook at home: if you do it right, cooking your own food at home is much less expensive than eating out. It’s certainly less exciting than going to sushi, but making large-pot meals will save you a ton of money (you can make a pot of chili, for example, for less than $20 — $10 if you go vegetarian — and it will last you days). 


Making a budget is a great way to ensure you stay out of debt and are able to save for a rainy day or retirement. Here are the basic steps: 

  1. Calculate your monthly net income. This is the amount of money that gets deposited into your bank account each month after taxes and insurance get taken out. 

(Pay Cycle Net) x (# of Pay Cycles per Month) = Monthly Net

  1. Calculate your monthly expenses. You do this by reviewing your recent transactions on your bank’s website or in whichever banking app you use. 
    1. First add up your monthly recurring expenses. (Things like your rent/mortgage, phone bill, internet, etc.)
    2. Then categorize and add up your incidental expenses. You should use the following categories: 
      1. Groceries
      2. Gas/Other car expenses
      3. Credit card/other debt payments
      4. Restaurants/Dining
      5. Entertainment (which should probably include alcohol if you’re going out drinking somewhat frequently)
      6. Travel
      7. Healthcare
      8. Miscellaneous 
    3. Account for recurring payments that occur less frequently (like insurance or water bills). Divide these expenses by the number of months they cover and add that to your monthly expenses (for example, an insurance bill that covers six months should be divided by six before added to the monthly accounting). 
    4. Account for deposits to savings accounts. 
  2. Do the math. Subtract your total monthly expenses from your total monthly net income. If the result is positive, you have a surplus (woo hoo!); if it’s negative, you have a deficit you’ll need to account for. See above for how to deal with a budget deficit, though the best advice will come from a professional financial advisor.