With inflation high and people resuming activities they gave up during the pandemic, Americans are now saving less moneyOpens in a new window than they have since the Great Recession. But savings are vital to financial security.

How to make sure you have money left at the end of each month to save? Tracking your monthly expenses can help you create a budget, control your spending, and free up money for long-term financial goals, like retirement.

What’s a budget and why do you need one?

“Budget,” like “diet,” carries a whiff of restriction. But it doesn’t have to feel like you’re starving yourself.

Simply put, a budget is a plan for where you’ll spend your money. Writing down your intention for every dollar you earn helps you avoid wasting money and gives you room to pursue new financial goals.

Understanding basic budget terms

To create a budget, you’ll need to understand the different kinds of expenses you have. Everyone has fixed and variable expenses as well as essential and nonessential ones.

• Fixed expenses are the same each time you pay them. These include things like monthly rent for an apartment, payments on a fixed-rate mortgage, most insurance premiums, student loan payments, etc. You know what you’ll owe before the bill arrives.
• Variable expenses may be different from month to month. Utilities are a good example: Unless you’re on a level-payment plan, your heating bill is higher in winter and lower in summer.
• Essential expenses meet the basic requirements of living: food, housing, clothing, medical care, and transportation.
• Nonessential expenses are nice-to-haves—things that you buy but don’t actually need to survive, like restaurant meals.

Essential expenses: the must-haves

We don’t all share the same needs. For instance, car payments could be essential if you live in a rural area far from work—but not if you live near a subway station.

Common essential expenses include:

• Housing. If you own a home, you may face mortgage payments, property taxes, homeowner’s insurance premiums, and homeowner association (HOA) fees. If you rent—besides the monthly check to your landlord—you may be on the hook for parking and other expenses.
• Utilities. Electricity and hot and cold running water are critical to healthy and safe living. (That might mean gas and heating oil bills as well.) An internet connection is important, too, and you may have to pay for trash removal. If you’re a renter, your landlord might cover some of these expenses. If you’re a homeowner, they’re your responsibility.
• Food. Everyone has to eat. The U.S. Department of Agriculture offers thrifty, moderate, and liberal food plans Opens in a new window as guidelines for how much you should spend on meals. (The USDA released the latest plans in 2021, so expect to pay more at least until inflation is back under control.)
• Clothing. You need clothing that fits your circumstances. For example, your budget will be higher if you work in a bank and wear suits than if you work from home in sweats. People who live in cold climates need to budget for outerwear as well.
• Transportation. This varies greatly depending on where you live and work. Maybe you can walk or bike to everything you need. But most people have some transportation expenses, like gas, parking, and car maintenance, or bus or train fares.
• Health care. If you have health insurance—either on your own or coverage you get through your (or your spouse’s) workplace—you’re paying regular premiums. The same holds for dental and vision insurance. And when you use a provider or get prescription drugs, you may also need to cover copays or deductibles. Of course, if you’re not insured, all these costs come out of your pocket.
• Debt payments. If you don’t pay at least the minimum due each month toward student debt, credit cards, and other loan balances, late fees could snowball out of control.

Nonessential expenses: the nice-to-haves

Essential expenses are important; they’re the needs, but they aren’t very exciting. Nonessential expenses are less important but more enjoyable; they’re the wants—and they vary far more widely than the must-haves.

• Entertainment. From dinner and a movie, theater or concerts to staying home with cable TV or streaming services, chances are you’ll want to budget for things that make life more enjoyable.
• Upgrades and extras. A refrigerator is essential—but upgrading to the latest model that makes three kinds of ice and tells you the weather? Nonessential. You may need a computer, but a powerful gaming machine with a huge screen would be a want. The same is true of furniture. Somewhere to sit: essential. Updating all your furniture to leather: nonessential.
• Enrichment. These are the expenses that might make your life healthier or more interesting, like gym memberships, classes, and newspaper subscriptions.
• Recreation. Soccer league fees, vacations, escape rooms. You might consider staying active and socializing essential. But because there are free ways to do that—like taking a walk with a friend—they fall under the nonessential category.

Creating a monthly budget

Before you make your monthly budget, you’ll need to understand your spending habits:

For three months, record everything you spend. Use an app, your phone’s notes section, or a notebook and pencil to document purchases as soon as you make them. Or keep receipts and log your spending periodically. The Consumer Financial Protection Bureau’s free, downloadable spending trackerPDF opens in a new window can help.

Write down every penny that leaves your hands (in cash or virtually). There’s no purchase too large or too small for this record.

Categorize your current monthly expenses

Once you have three months’ worth of expenses written down, label each expense as essential or nonessential, and as fixed or variable. (Use the categories and examples from the previous sections as your guide.)

Sometimes it’s hard to tell the difference between needs and wants. The answer might come down to context: If you must use a computer to work, it’s a need. If you use your computer only for social media, it’s a want. Also, part of an expense might be a need, while the rest is a want. For most people, a mobile phone is a necessity—if it breaks and isn’t fixable, a replacement is essential. But the cost difference between a basic model and one with all the extras is a nonessential expense.

Once you’ve categorized everything, review each “essential” item and ask yourself if the entire expense was truly essential. You might find partial costs you can do without.

How much should you spend?

Once you know what you’re spending today, you can create a plan for tomorrow. Do you need to cut back? If you’re spending more than you earn (after taxes) each month, the answer is almost certainly yes. But even if you spend less than you take in, you may have room to accommodate items you want or need to add, like a new monthly savings goal or an increase in rent.

Remember: Making a budget doesn’t mean you must eliminate all your nonessential expenses. They can be great additions to your life—just not things you absolutely need. You separated them from essential expenses to enable your decision making, not to beat yourself up.

Planning for long-term financial goals

As you think about essential expenses, remember that saving for your future should be a non-negotiable budget item—even if you start by setting aside a small sum every month.

Consider the things you’ll eventually want your money to provide. These could include:

• Large purchases. You can save up for a car, a house, or higher education for yourself or a family member.
• Retirement. Eventually you’ll want or need to work less or not at all. You’ll need savings to cover your expenses when that time comes.
• A financial cushion. Emergencies and sudden opportunities happen. To cover one and take advantage of the other, you’ll need savings.

Create your new budget

Your new budget will look a lot like your spending log. The difference: Instead of recording what you’ve already spent, you’ll write down what you plan to spend. First, list all the categories you’ve been spending on. Then, add any new categories you want to spend on going forward.

When you need to cut down on monthly expenses

Look at both your essential and nonessential spending for places to cut costs. These might include:

• Housing. A smaller place, a less expensive city or neighborhood, or a roommate can reduce your housing costs.
• Food. Eating out costs more than cooking at home. Cook for yourself (plus your family or friends) using food that’s in season. If you drink alcohol, either cut back or drink at home, which is much cheaper than drinking at a restaurant or bar.
• Shopping. Sell what you’re not using and consider buying gently used items. eBay, Poshmark, Craigslist, and in-person tag sales are places to unload things that you don’t need and find bargains on things that you do.
• Transportation. If it’s practical, replace some driving with walking, biking, or public transportation. Regular bus and train trips are often less expensive with a monthly pass than a ticket for every journey. If you have a car, explore insurance discounts for good drivers, low mileage, bundled policies, and affiliations. (If you’re in school or have a young driver who is, see if there’s a break for good grades.) And don’t pay extra for premium gasoline unless your car requires it.
• Debt. Revisit your repayment strategy. See if you can refinance or consolidate debts at a lower interest rate (which may be harder to do now, with historically low rates finally on the rise). If you have student debt, look into loan forgiveness plans. And if you can’t pay off your entire credit card balances, at least pay more than the minimum each month. Paying extra can help lower your monthly payments and get you out of debt faster.
• Treats. Instead of telling yourself to completely eliminate spending on wants, focus on the extras you enjoy most. A gym membership you use every day is a better choice than a streaming subscription you use once a month.
• Mindless or overlooked purchases. If you don’t need, use, or enjoy something, stop buying it. Be aware of impulse items that stores often place near checkout. And check your credit card statements for subscriptions you no longer use and may have forgotten you have. (Cancel them.)

Written by Ingrid Case 

 Ingrid Case is a writer and editor in Minneapolis, Minnesota, and a former senior editor at Bloomberg Markets. Her work has appeared in Bloomberg Markets, Money, and Financial Planning magazines.

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