Morgan Stanley
  • Wealth Management
  • Dec 19, 2023

5 Steps to Create a Budget

Your everyday spending can affect your longer-term goals. Follow these five steps to spend smartly now—so you can reach your goals later.

While following a budget might seem limiting, when used as a guide, a budget can empower you to take control of your financial life. Having a good understanding of your monthly saving and spending habits helps you make smart financial decisions that can position you for success in the long run and reduce your money-related stress.

Creating a budget may sound simple, but a flawed financial map can leave you struggling to reach your goals. Sometimes the collective everyday spending decisions you make have a material impact on your longer-term goals. Fortunately, a combination of tried-and-true practices and modern tools can help you find your way. And even if you’re already good about budgeting, it can be helpful to periodically revisit your plan and adjust it to reflect your current situation.

Here are five steps that will help you avoid money-related stress and make smart spending and saving decisions:

1. Determine Your Income

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 you and other business expenses from your gross income. 

2. Figure Out Your Fixed Expenses

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

Consider contributing to your savings as 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. 

3. Estimate Your Variable Expenses

Variable expenses fluctuate from month to month. 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 spend in each category on a regular basis. Total those up for a monthly average and figure out where you should be cutting back if necessary.

Remember to keep in mind those expenses that don’t happen every month like presents and vacations. 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.

4. Put It All Together and Do the Math

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. Your focus should be 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. 

5. Know Your Priorities and Track Your Progress

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.

If you haven’t enrolled in Morgan Stanley Online, visit to register. Or you can speak to your Financial Advisor to help get you started.