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The loan servicing company OppLoans recently surveyed 1,100 people across the U.S. to learn more about their financial situation. Here were some of the key takeaways:
- 52% of respondents say their debt is not manageable.
- 1 in 3 admit to frequently experiencing stress or anxiety about their finances.
- 25% say they took out a personal loan during COVID-19 to cover basic necessities.
- 2 in 5 say they live paycheck to paycheck.
- 53% say they have no savings account or emergency fund. Of those who do have an emergency fund, 20% say they could only live off it for three weeks.
And here are two more stats you may find surprising: 1 in 10 respondents said they didn't have a budget at all. According to a CNBC report, 73% of people don't regularly stick to a budget.
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Whether you have never tried using a budget or you're not particularly good about keeping up with it, you may find that the right budget can change your life.
The right budget
We each have a favorite flavor of ice cream, a movie we could happily watch 100 times, and a learning style that is unique to us. Budgeting is not a one-size-fits-all proposition, and we shouldn't all be using the same budgeting method.
There are many different ways to set up a budget. Some people use the envelope method, while others use reverse budgeting. Some people use a budgeting app, while some of us prefer to write things down in a notebook -- the old-fashioned way.
The point is this: There's no shame in not yet having a budget (or not liking the budget you currently use). Finding the right budget is like meeting the "perfect" person. You'll know it when you find it.
Although finding the right budget for you may take a little effort, you'll find that it's worth the trouble. Here are some of the ways the right budget can make your life easier.
1. You'll have fewer cracks to fall through
You may not have many bills to juggle, and keeping them straight in your mind is not a problem. Still, things happen. If you get sick or distracted in some other way, having a budget to glance at helps ensure that you've paid everything that's due. The fewer late bills, the fewer late fees you'll owe.
2. You'll have a better sense of where you stand
Let's say you earn $75,000 annually, you want to buy a home, but aren't sure you can qualify for a mortgage. You have a car payment, a personal loan, and a couple of credit cards with outstanding balances. In all, your fixed monthly payments amount to $1,100.
The amount you're hoping to borrow is $300,000. If you were to land an APR of 7.5%, your mortgage payment (counting principal, interest, taxes, and insurance) would be in the vicinity of $3,700 every month.
One factor mortgage lenders use to determine eligibility is debt-to-income (DTI) ratio. In a nutshell, DTI compares how much you owe each month to how much you earn. In this scenario, your total monthly payments are $4,800 ($1,100 + $3,700). And if you earn $75,000 annually, that means your monthly income is $11,050.
To find your DTI, a lender divides monthly debt by monthly income to come up with a ratio. Yours would look like this: $4,800 ÷ $11,050 = 0.43. That means that you'd have a DTI of 43%. Most mortgage lenders want DTI to be 36% or less. In fact, the lower your DTI, the less risk of missed payments.
To get your DTI down to an acceptable level, you would need to pay off pre-existing debt.
What does DTI have to do with a monthly budget? A budget serves as a monthly reminder of how much debt you're carrying and allows you to quickly calculate how much your DTI is. You can see when it's creeping up and take steps to bring it down.
3. Less anxiety
For some of us, the most beneficial thing about having a monthly budget is the (relative) sense of control we have over our finances. Nothing is left to chance because we always know where we stand. We can't control what happens in the future, but we can build things like an emergency savings fund into our monthly budget.
A monthly budget may not make you wealthy or prevent bad things from happening, but it can provide you with the insight you need to make strong financial decisions.
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