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5 Steps to Successful Budgeting

Jun. 15, 2018 Wisebread

Step 1: Automate essential, recurring living expenses
Let’s start with the basics: Add up all monthly household income and make a list of all necessary monthly expenses, like housing, utilities, and groceries. Since these are nonnegotiable expenses, take time to set up automatic payments to cover as many of these items as you can. In many cases, you can even choose the day you’d like your bills to be debited from your account, so consider when you get paid each month. Arrange to have your bills automatically deducted when you know you’ll have cash available.

Next, subtract your bills from your income. If there’s no money leftover after paying your bills, or you’re not able to cover your bills, there are only a few viable options: Make more money, get another job, or spend less. If you’ve got extra money after paying your bills, move on to step two.

Step 2: Automate savings
Generally, you’d like to get your personal savings rate to 15 percent of your gross income. If you’re saving for other big-ticket items, like a home or college education, in addition to retirement, you may need to save more. Yes, everyone’s situation is different and everyone is at a different point in their lives — but if you have available cash, you should be saving something. Set up automatic transfers from your checking account to your savings account on the same schedule as your other essential bills.

Step 3: Establish a debt reduction plan
Debt and credit are vital aspects of our financial system and allow individuals to accomplish their dreams, like owning a home or paying for college. But high levels of consumer debt, including student loans and credit cards, can stunt your ability to save and can negatively affect your borrowing ability. One common bench mark is to limit your consumer debt repayment to 20 percent or less of your net monthly income.

If you’re having a hard time meeting your financial obligations and goals because of a heavy debt load, make a list of all outstanding debts owed, including the total amount due, monthly payment, and interest rate. Always make at least the minimum payment due on all accounts to remain in good credit standing.

Next, focus on one debt — either the lowest balance or the highest interest rate — and send any extra money that you may have toward that debt. When that debt is paid off, take the money you were sending to that paid-off debt and redirect it toward the next debt in line. Continue this process until all debts are paid in full. If you’re struggling to come up with a workable repayment plan, check out, which offers a free tool that you can use to run various payback scenarios that can illustrate how to best utilize any extra funds you have to pay off your debt.

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