The Secret to Maintaining a Balanced Budget

Balancing your budget so you can stop living paycheck to paycheck

A balanced budget ensures that all of your various expenses can fit the foundation of your income, so you can maintain a stable house through any challenge. But what’s the right balance for your budget structure?

When you live paycheck to paycheck your income barely fits all of your expenses. In order to create balance, you’ll need to check your income-to-expense ratio.

Divide your total monthly income by your total monthly expenses. If the ratio is less than 1, it means you spend more than you make and your financial house may fall behind because it’s too big for its foundation. In most cases, you want to achieve a ratio of 1.25 or greater. This means you spend less than 75% of your income, which leaves 25% of your income as free cash flow in your budget.

Some of your cash flow can be converted into savings. This helps you increase the amount you dedicate to save, so you can have a robust, solid saving strategy that supports your goals. Ideally, savings should be treated like a regular reocurring expense in your budget. This means savings gets housed with the rest of your fixed expenses. Aim to save at least five to ten percent of your income each month.

This is beneficial because unexpected expenses always seem to show up. When a large expense arrives unannounced, it has the potential to throw your financial house out of balance. But free cash flow and savings help you accommodate unexpected expenses easily. That way, you don’t have to invite credit card debt in for unexpected costs, because credit card debt shouldn’t be a welcome solution to address budget challenges.