Freedom Life Planning

The Ultimate Guide to Financial Planning

How to Make a Budget

Making a budget may sound like work that takes the freedom out of your life, but I’d say it is the opposite. Making a budget is the first step towards getting the most out of your spending money and ensuring you meet your savings target to obtain your goals. It is really important that you see your budget, not as a restriction on your spending, but on maximizing your dollar to go further for you. A budget will determine how much spending you can allocate per category based on your savings goals and income level.

In this article, I will go over how to make a monthly budget to do just that. A monthly budget is the ideal period to use as most expenses occur monthly. For expenses that are weekly, annually or sporadically you can just average them out over a month period.

Here is a sample budget:


The first step of creating a budget is knowing your monthly income. If your income is steady (fixed salary or wage), you can use this amount directly. If you make bonuses, I’d exclude these from the budget. When and if you do get your bonus, it will be a nice boost that can be split between spending and savings.

If you make a significant portion of your income from commissions, you will need to use your best judgement and use a conservative percentage. Something like 60-80% of your commission income from the last 6-12 months. The more confident you are in maintaining the commission, the higher percentage you may use.

To determine the monthly income from a weekly paycheck, multiply it by 4.333. If it is a bi-weekly paycheck, multiply it by 2.167.

Savings Target

Establishing your savings target is the next step. This is the amount set aside to reach your future goals such as retirement, buying a home or other big purchases. You can have multiple savings targets for multiple goals, combine them all or list them individually in your budget. The important thing is that you deduct this from your income before you start allocating your spending targets.


Savings Target #1 = New Home = 500$

Savings Target #2 = Retirement Savings = 300$

Savings Target #3 = New Car = 150$

Total Savings Target = 950$

I strongly recommend you establish your savings goals first, however if you aren’t sure yet, I recommend saving at least 15% of your after-tax income. This will at least provide you with a safety cushion and some retirement savings while you work to establish your goals and life plan.


In the above example, I’ve separated the spending into two main sections, Needs and Luxuries. I prefer to separate it like this as luxuries are easier to cut down on if you need to find additional savings. That’s not to say savings cannot be found in the “needs” categories, just that it may be more difficult to do so without cutting your basic needs.


Needs are defined in your budget as the required spending you will have to pay each month to go through your life. While you can technically cut down on your needs in the long run (smaller car or apartment, etc) you cannot do it quickly. If you have rent or car payments, it would be a long term plan to change these. Therefore I have classified them as needs. Even something like a gym membership is not technically needed, but it is a healthy lifestyle choice that I would keep as a need just as much as eating properly.

Establish your needs by categories as shown above. Add in anything that would be a major expense for you (at least 5% of total income) as a separate spending category. Also, any spending category that can be improved should be a separate line item in your budget. Try to minimize the amount allocated for the miscellaneous expense category in your budget as much as possible. I understand it is impossible to categorize everything, but think hard about your expenses, review past account statements and do your best. The reason for this is that it is hard to improve your spending habits if a large percentage of your needs fall under “miscellaneous”.


Luxuries are defined in your budget as speciality expenses for treating yourself. Taking a vacation, going out to a restaurant, attending a sports game, etc. These are the expenses that are the easiest to cut down on when you need to find more savings. However, it is important to enjoy life, at every stage, and this is the best time to think about what is really important for you and allocating your hard earned dollars towards it accordingly. Some people love to travel and will want to save every penny towards that goal. Seeing it all written down in a budget lets you have a good idea of the sacrifices you are making elsewhere to achieve that luxury spending.


The remaining amount when you subtract your Savings Target and Spending from your income is your contingency. Note, this must be a positive number! If not, go re-examine your spending, starting with the luxuries. I’d suggest to have at least 3% of your income in contingency funds as surprises do occur in life. You may also surpass one of you spending categories and taking from your savings is not an option unless it is an emergency.


Now you have a basic template for your budget. It’s time to review it. Go line by line through each need and luxury and think if there are opportunities to save. Can I make my lunches for work and save on eating out? Can I renegotiate my insurance rates or shop around for a better premium? Challenge each expense category to determine if you can do better. Spending more on travel may bring you more enjoyment, however spending more on car insurance will not!

Once you have reviewed everything, and are meeting your savings target, you are set. Now to execute.


Now making a budget is one thing, following it is even more important. There are a lot of easy free ways to track your spending. Here are some examples:

  • Your Banks finance tracking tools
  • Microsoft Excel (for those who are familiar)
  • A Purchased personal accounting software

I recommend using debit or credit cards (pay your full balance every statement!) to spend your money. I avoid cash unless there is a clear advantage or it is the only thing accepted. The reason for this is it is much harder to track a $200 cash withdrawal at the end of the month and remember where it went. Credit cards will allow you to collect reward points as well.

In the first week of the new month, it is time to review your spending from the previous month? Were you on target? Under or Over budget? If it is not a monthly expenses, it may be alright to go over budget. Like taking a $1,200 vacation in your 2nd month will show as way over budget. Those big expenses can be reviewed annually. For everything else, it is time to review and make adjustments.

Please be sure to check out other articles on this site for more details on specific topics touched on in this one.

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