It’s finally time. You’re going to make a budget and stick to it. You’ve tried it in the past, but somehow, you always wind up overspending, not meeting your savings goal, or getting overwhelmed by the whole budget process. This usually comes from a lack of proper planning, and it’s easy to slip up if you don’t know how to prepare for a monthly budget. This guide teaches four essential steps everyone should follow to set up a successful budgeting plan.
Step 1: Measure Your Debt-to-Income Ratio
If you want to get rid of debt, you need to fully understand how much it impacts your monthly spending. People can often get so used to the cycle of paying bills that they don’t step back to assess exactly where their money is going and find ways they could pay more efficiently.
To calculate your debt-to-income ratio, add up all of your debt and divide it by your monthly income. The result will show your DTI as a percentage. Ideally, you should keep debt under 36% of your income. Debts to include are rent/mortgage, utility bills, credit card bills, and any other routine expenses.
Step 2: Set SMART Goals
SMART stands for specific, measurable, action-oriented, realistic, and time-bound. What does this look like on a budget? It could be paying off a certain amount of debt within 30 days, setting an attainable monthly savings goal, and committing to reducing spending by a certain percentage in a month.
You may want to start with smaller goals to build confidence. As you progress, you’ll feel more capable of achieving long-term goals.
Step 3: Set a Minimum Savings Amount
It can be hard to always save as much as you plan, but with an easy minimum amount like $25 or $50, you can feel comfortable knowing you’re always making progress toward your goals. You can set a minimum that’s doable for your income. Rather than feel bad if you don’t hit a certain goal in 30 days, you can feel proud that you’ve still stuck to your minimum savings goal.
Over time, as you pay down debt, you may diversify your savings goals. For example, you might set some money aside for retirement and some for a vacation fund. It’s easier to be strategic with your savings after you’ve already made saving money a habit.
Step 4: Look at Your Last 90 Days of Spending
Mobile bank apps make it easy to review your monthly spending history. Check out yours for the last 90 days and see what you spent the most money on outside of essentials. You might be surprised at how many small expenses turn into a lot of money lost each month. Consider scaling back by setting goals on what you’d like to reduce spending on over the next 30 days.
Step by step, you’ll build better money-saving habits that ultimately help you reach your financial goals. Remember to be consistent and keep trying, even if you don’t make your goals the first time you reach for them. Over time, your hard work and dedication will pay off.