What is a Budget?
A budget is an estimate and planning of income and expenditure, and commonly refers to a methodical plan to spend money a certain way. Generally, budgets are created to reach certain financial goals, such as paying off several credit cards, reaching a certain savings goal, or getting income and expenses back on track.
There are many different reasons why people create budgets, and even more ways to go about doing so. The Budget Calculator evaluates the components of a personal budget and highlights which specific areas need improvement based on industry benchmarks like the Debt-to-Income (DTI) ratio.
How to Use This Calculator
Budgeting can generally be summed up by two things: living within your means and planning for the future. Successful budgeting usually involves having a detailed personal budget and adhering to it.
Living Within Your Means
Millennia-old teachings and countless financial advisors echo the principle of living within your means. The biggest financial blunder people can make is simply spending more than they earn, which over the long-run snowballs into more and more debt. Overly relying on credit cards and attempting to "keep up with the Joneses" are standard reasons why individuals struggle to keep their budgets balanced.
Planning for the Future
Proper planning can help predict future financial standing according to best estimate forecasts of income and expenses. Proper planning helps with mitigating sudden misfortunes, loading up on emergency funds, getting ready for the purchase of a new house, properly managing investments, and preparing for retirement.
The Formula / The Method
Our budget calculator uses several industry-standard formulas to help you analyze your financial health, including the widely used Debt-to-Income ratio.
Net Income = (Gross Income - Taxes) - Total Expenses
DTI = Total Monthly Debt Payments / Gross Monthly Income
Front-End DTI = Housing Costs / Gross Monthly Income
Frequently Asked Questions
Generally, a DTI ratio below 36% is considered good, with no more than 28% of that debt going towards servicing your mortgage or rent. If your DTI ratio exceeds 43%, you may have trouble qualifying for a mortgage or additional loans, as lenders view you as a higher risk.
Front-End DTI refers specifically to the percentage of your gross income that goes towards housing costs (such as mortgage, rent, property taxes, homeowners insurance, and HOA fees). Standard DTI (Back-End) includes housing costs plus all other recurring debt payments, like student loans, auto loans, and minimum credit card payments.
A general rule of thumb is that your housing costs (rent or mortgage, taxes, and insurance) should not exceed 28% to 30% of your gross monthly income. Keeping housing costs within this range gives you enough flexibility to save, invest, and handle other living expenses without being house-poor.
Financial experts generally recommend saving and investing at least 15% to 20% of your gross income. This allocation should cover your retirement contributions (like a 401k or IRA), emergency funds, and any other long-term investment goals you have set.
If your budget results in a deficit (meaning you spend more than your after-tax income), you need to make immediate adjustments. Start by evaluating the "Miscellaneous" and "Living Expenses" sections, such as dining out, hobbies, and entertainment, as these are usually the most flexible. Reduce unnecessary spending or look for ways to increase your income streams.