Nail Your Budget With a Budget Calculator
A budget calculator goes a long way in ensuring your expenses are proportional to your total monthly income.
Contributing Writer at Tally
January 11, 2022
Without proper care and review, your finances can quickly get out of hand. This is where a monthly budget comes in and helps you keep your money in check. But before you can build a budget, you must create a monthly budget calculator to ensure your monthly expenses align with your total monthly income.
Below, we'll show you how to manually calculate your budget and how to make adjustments if your expenses and income don't align.
How to calculate a budget
Calculating a budget may seem like just simple math, but there's more to it than that. A budget calculator can also help you analyze your expenses and determine if you're spending too much in one area or too little in others.
Step 1: Determine your monthly income
Budgeting begins with your take-home income — the money you get after taxes, benefits deductions and other withholdings such as child support or alimony — per month. If you get paid a salary, simply add up all your paychecks for the month to determine this amount.
If your paychecks vary because you work on commission, work hourly or own your own business, you’ll need to calculate an average. Collect as many pay stubs as you can or go into your online banking and find your paycheck deposits. Add these up and divide them by the number of months they cover. Ideally, you want to collect a full year's worth of pay stubs for the most accurate calculation.
For example, if you earned $3,000 one month, $5,000 another month, $4,000 another month and $3,500 in another month, your average pay you'd use for budgeting would be $3,875.
$3,000 + $5,000 + $4,000 + $3,500 = $15,500
$15,500 / 4 months = $3,875
If you generally earn a yearly bonus, you can add this to your salary by dividing your average bonus over the past few years by 12. So, if your typical bonus is $10,000, this would equal an extra $833.33 per month.
Alternatively, you can bypass the monthly calculation and simply add the entire bonus to your monthly budget on the month you receive it. In fact, some personal finance experts recommend leaving bonuses off your budget altogether.
Step 2: Calculate your needs
The next step in budgeting is calculating your needs and how much of your income they take up. Needs are things you must pay for every month, such as:
Rent or mortgage payment
Minimum monthly debt payments (e.g., student loans, car payments, credit cards, personal loans)
Personal care items
Health insurance premiums
Homeowner's or renter's insurance
In most cases, these monthly expenses should take up about 50% of your after-tax income. Using our example income above ($3,875), your needs should total about $1,937.50.
If you have monthly expenses that vary from month to month, add up the past 12 months’ worth of bills and divide the result by 12 to get the average. And if you have bills that occur less frequently than monthly, like quarterly or yearly, divide the total cost for the year by 12 to get your monthly average.
Once you’ve listed all your monthly needs, add them together. If they slightly exceed 50%, you're still OK. However, if your needs take up 60% or more of your take-home income, you may need to adjust. Perhaps find a lower-cost place to live, sell your vehicle and take public transportation, or adjust your grocery expenses by shopping store brands or couponing.
Step 3: Calculate your wants
Nights out with friends
Streaming subscriptions (e.g., Netflix, Pandora, Disney+)
Unlimited cell phone plan
Coffee from a coffee shop
Movie theater tickets
These expenditures are more difficult to average out to see what you currently spend, so stick to future planning for these expenses. You can plan ahead for the charges that remain the same each month, such as streaming subscriptions and cell phone plans. You can then subtract these from the 30% of your net income (take-home pay) you plan to spend on this.
For example, using the $3,875 salary from above, 30% would be $1,162.50. If you spent $100 per month on streaming services and $75 per month on your cell phone plan, this would leave $987.50 for any remaining wants throughout the month. If you exceed this 30% mark or need to shift more money to your needs, it’s relatively easy to trim from here.
You can track these expenses with a pen and paper, in a budgeting app or with a spreadsheet program such as MIcrosoft Excel or Google Sheets to ensure you remain on budget.
During the first few months, you may find yourself running slightly over budget. Don't feel defeated when this happens. Just make adjustments the following month and try again.
If you find this is a consistent issue, it may be best to have a separate bank account just for wants, and deposit only what you budgeted. This will help you stay on budget.
Step 4: Determine your leftover cash
With your needs and wants calculated, you can now determine how much leftover cash you have. If you followed the 50% and 30% guidelines closely, you should have around 20% remaining. In our example salary, this would be $775.
However, following the 50/30/20 budget isn't always possible, so you may end up with more or less than 20%, which is OK. Whatever your leftover income is, you can apply this to your most pressing financial goals. These goals can be paying off debt, building an emergency fund, growing your retirement savings or tucking money in a savings account for a high-cost item, like a down payment on a home.
If you have multiple financial goals, you can split this 20% among them, such as applying 15% to your retirement accounts and 5% to paying off debt. Always be mindful of interest rates, though. If you have a lot of high-interest credit card debt, it would likely be in your best interest to focus all or most of this 20% on paying it off.
Get your finances in check with a solid budget calculator
There’s no need for your finances to run wild. You can corral them with a budget and set yourself up for financial success. If all this manual adding and subtracting is a little overwhelming, there are also free budget calculator apps online to help streamline it.
Using a budget calculator to create a monthly budget lets you see where your money goes and where you may be overspending. You can then make adjustments to your budget, as needed, to ensure you remain in a stable financial situation while making the most of your total monthly income.
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