5 Steps to Create a Budget

Specifically, you’ll want to determine your average monthly income. This may be a simple matter of reviewing your take-home pay on your paycheck—the amount left after taxes and other withholding. However, if your income varies by month, estimate by averaging the past six to 12 months of income. To be most conservative, work with the income amount from the month with the lowest income during that time. If you’re self-employed, deduct the estimated taxes and other business expenses from your gross income. 

Fixed expenses are those regular expenditures that don’t change much from month to month. T these may include rent or mortgage payments; utility bills such as for water, electricity, internet and cell phone; insurance premiums; transportation costs; and debt payments like student debt or car loans.

Consider savings contributions a fixed expense. Decide on a percentage of your income that you’d like to save every month and treat it like a bill you must pay. Set up an automatic deposit to help you save a set monthly amount. Before you know it, you won’t miss that money at all. 

Variable expenses fluctuate from month to month, and it’s common to underestimate them. They may include discretionary expenses such as entertainment, eating out, shopping, travel and more. Look back at your past few credit card bills or bank statements to gain a sense of roughly how much you regularly spend in each category. Total those up for a monthly average and figure out where you can cut back if necessary.

Keep in mind those expenses, like presents and vacations, which don’t happen every month. To make sure these one-offs don’t catch you by surprise later, try estimating how much they cost you on an annual basis. Then divide by 12 so you can budget for them and put that money aside throughout the year.

Add up your fixed and variable expenses and deduct them from your monthly income after taxes. If you’re left with a negative number, you’re spending more than you’re making, and something needs to change. Focus on making this number positive as soon as possible. Once you’re making more than you spend, you can start to think of your future finances. 

Do you have a rainy-day fund in case of an emergency, like a job loss or unexpected home repair? Are you prioritizing the repayment of your debts? Are you saving for retirement? Looking to buy a home or make another major purchase? Trying to build an education fund for you or for your children?

List your top priorities to help you figure out how you’ll use any extra funds in your budget after your necessary expenses. Depending on your timelines, decide whether it makes more sense for you to save or invest your money for each goal.

Keep yourself on track by periodically monitoring your budget. You can do this with an old-fashioned pen and paper, by creating your own spreadsheet or by using one of Morgan Stanley’s digital solutions to track your earnings, spending and budgeting. The Spending and Budgeting tool is one such solution available on Morgan Stanley Online and the Morgan Stanley Mobile App. This tool allows you to set budget goals for each spending category and will send you alerts when you are at risk of exceeding the amount, or when you have met your monthly budget goals. It even tracks your non-Morgan Stanley accounts, helps you to set goals to improve your financial picture, and can be shared with your Financial Advisor as part of their review of your complete financial picture.