The best way to keep your finances in check is to prepare and stick to a budget. Without a budget, it can be difficult to achieve your savings and other financial objectives. A tight budget can help you identify areas where you can cut down on costs and still live comfortably.
However, there are a few things that can mess up your budget. Knowing what to avoid can ensure you stick to your budget and be on track to meet your financial goals. Below are three things that can mess up your budget.
While budgeting will help you keep track of your expenses, things can happen that are not in your control. For example, when the price of a basic commodity like milk goes up, do you simply buy less milk or reduce gas consumption?
When making a budget, consider factors that can happen that are out of you control. If you do not account for unforeseen circumstances, you will end up not following your budget and in essence not benefit from planned spending.
Lacking financial intelligence
While budgeting is meant to help you make intelligent financial decisions, if you do not use common sense and pay your bills on time, you will not be doing yourself any favor. Most of the time, common sense will help get the most out of the budget and improve your financial situation.
For example, it is common sense that you should keep your debts in control, use credit cards only when necessary, ensure your credit score is up to date and correct, and pay your bills on time.
Not considering your debt to income ratio
Before you draw up a budget, consider your debt to income ratio. The DTI ratio simply implies the amount of income you get verses the debts you have. To calculate the ratio, divide your total monthly debts by your total monthly gross income. The lower is the DTI ratio, the better.
Ideally, the DTI ratio should not be more than 30%. If it is, pay off your debts more than the required minimum to bring the ratio down.