ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

4 Steps to Managing Debt, Income and Savings

Updated on September 18, 2009

Sometimes it is easy for time to go by and we ignore our finances, hoping that any problems will go away and not wanting to see any potential for issues in the future, but this is not healthy. It could cost you now or later. You need to always be aware of your financial situation – not every minute of the day – but have a general idea as to where you stand and manage finance appropriately. Then you do need to take a closer look every few months or so, just to make sure that you are still in touch with managing debt, monthly savings and income are at.

You can do this by following the 4 steps that I outline here. It may seem like a lot at first, but when you’ve been through it once, you’ll find it gets easier.

Your debt-to-income ratio is an important measure of your financial position
Your debt-to-income ratio is an important measure of your financial position

Determine Your Income and Your Debt

One of the best ways to get an idea as to your financial position is to calculate your debt-to-income ratio. It sounds daunting, but it really isn’t. It is just a comparison between the debt that you have and your income. (In this case you don’t include your mortgage or rent payment in your debt.)

Let’s explain the calculation by means of an example:

Firstly, it is most appropriate to calculate this ratio on a monthly basis. So you need to determine your monthly income. This needs to be your income after all deductions (tax, medical etc.) i.e. what you take home at the end of the day. If your salary is not constant from month to month, take an average of your monthly salary over the last 12 months.

Remember that you must include all income. So if you have multiple sources of income – a job on the side, interest, rent, averages of bonuses etc; whatever comes into your pocket (minus the deductions).

Secondly you determine your total amount of debt.

Sum up all of your minimum monthly payments for all loans and credit that you have – exclude mortgage or rent payments; but include things like car payments, bank loans, credit accounts etc.

Now that you have these two figures, you can calculate your debt-to-income ratio:

Take you total monthly debt and divide it by your total monthly income.

You can make this a percentage by multiplying it by 100.

So, say the income that you take home each month is $3,000 and you pay $600 per month towards debt repayments, your debt-to-income ratio is 0.20 ($600 divided by $3,000) or 20%.

Why is this ratio really important?

This ratio is not only relevant as a benchmark, it is also helps you with managing debt and spending. If you are aware of your levels of debt and your income, you can:

  • Be more discerning when it comes to making purchases
  • Be informed when wanting to apply for further loans
  • Prevent your debt from rising uncontrollably
  • Avoid major problems with debt

Not only is your debt-to-income ratio important for you, but it is also something that lenders will consider when determining your credit status.

What should my debt-to-income ratio be?

It should be below 20%. The reasons?

  • With a higher ratio you are going to find it more difficult to get further credit if you want it
  • You won’t get the best terms and interest rates
  • Most importantly, you don’t want to have troubles getting a loan in the case of an emergency.

If your debt-to-income ratio is above 20% now, work seriously on reducing it and keeping it low. If your ratio is below 16% you are doing OK, but always the lower the better, so don’t necessarily sit back on your laurels if you get to 15%.

To reduce this ratio and get out of personal debt you need to pay more than the minimum monthly amount on your debt repayments. This has the added bonus in that as you reduce debt, your interest rates will drop and you will have more money for other things.

Track Your Expenses

Now you need to determine on what you are spending your money.

You have three types of expenses:

  • Fixed expenses – those which remain the same each month
  • Varying expenses – those that differ from month to month
  • Occasional expenses – those that happen every so often throughout the year

Let’s give some examples of each of these:

  • Fixed Expenses: These will be monthly membership and subscriptions fees, bond repayments or rent, insurance, school fees etc. Don’t include anything that has already been deducted when you calculated your take-home salary.
  • Varying Expenses: groceries, petrol, entertainment, miscellaneous items, clothing etc.
  • Occasional expenses: vehicle and household maintenance, household appliance replacements, special occasions, licenses, vacations, unexpected medical costs etc. These usually occur only once or twice a year and are often rather large. You need to cater for these expenses and set aside a monthly saving for when they come around.

For the fixed and varying expenses, the best way of really seeing where your money is going is to record you expenditure for a month. Make a note of every dollar you spend – right down to parking and a small coffee. If you think you will battle to remember when you get home, carry a pen and small notepad around with you and jot down what you spend.

If a month truly seems impossible for you, try two weeks. It really is a worthwhile exercise as you’ll wake up to where you are in fact spending your hard-earned cash on things that are not a priority for you.

By the end of your data gathering period you’ll know what your fixed and varying expenses include.

When determining your monthly expenses it would be best to take an average of these expenses over a three month period.

For the occasional expenses, you need to look back over the last year and make a list of all expenses that were not regular. Estimate what these will be for the coming year and divide by 12 to get a monthly amount. This is what you need to set aside each month to cater for these expenses when they come around.

So your monthly income need is then your fixed and varying monthly expenses plus your savings for occasional requirements.

Compare Income to Expenses

Now you come to the crucial question as to whether your income is enough for your needs. Take your monthly take-home income and subtract your monthly expenditure (including that saving for occasional needs). If the result is positive, you have money to spare – at least some of which you need to save. However, if the result is negative, you need to start cutting back or earning more.

Usually the former is easier (and quicker). The best thing to do is set up a budget. Now that you have all of the details of your income and your expenses, it will be a straightforward task. The easiest place to cut back is on your varying expenses. Perhaps you don’t need to buy lunch and can take a packed lunch with you to work.

If you were in the negative, you must continue to monitor your spending in detail to ensure that you are sticking to your goals and that you reductions are enough. Also keep a record of what you save as this makes the exercise more motivating.

Personal savings are important for security and future expenses
Personal savings are important for security and future expenses

Monthly Savings

The next step in the management of your finances is saving. This is extremely important for a number of reasons such as retirement, schooling, emergencies, loss of income and so on.

Experts say that you should have at least three months salary saved for “in case”. Once your income minus your expenses is positive, you need to put these extra funds away.

It’s best to setup a separate account for this money.

In Conclusion

This may all seem like a huge undertaking, but it doesn’t need to be done every month – perhaps once or twice a year at most. The main thing is to know that you are on track with managing finances and just check up on that every so often. It is worth your while to know where you stand and to ensure that you have those savings for a rainy day.

Image credits: quaziefoto; alancleaver 2000


    0 of 8192 characters used
    Post Comment

    • profile image

      Jeremy Elliott 

      5 years ago

      I found the article very helpful. This is definatly a good way to keep track of what is going in and out of your wallet each month. If you can't keep track of what you have and what you owe, how are you going to know if you are caught up or not?

    • profile image


      6 years ago

      I really enjoyed reading what you had to share here. I see that I need to sit down and figure out my debt-to-income ratio. Thanks for this tip! I can say that it would be nice to have 3 months of salary saved up but that will be a long-term goal for myself. Thanks again for the article. Really enjoyed reading this.

    • profile image

      jennifer oetzel 

      6 years ago

      This artical puts everythign straigt foward. It explains very well the difference in all the expenses that you can have monthly or yearly. It is nice to know about the debt to income ratio and where it should be at and why it should only be 20% or under and not over. Reading this was great and help in the area that I am not the best in.

    • profile image


      6 years ago

      What an incredible article goes straight to the point. Voted awesome. Would love to hear your comment on my article

    • athulnair profile image


      6 years ago from India

      Awesome hub about financial management, in which I am really bad.

    • profile image

      Michael Vinson 

      6 years ago

      I really enjoyed reading this article, I think that it makes perfect sense. Most people try as hard as they possibly can to ignore debt and loke the article states they act as if you ignore it, then its going to go away, but the truth of the matter is, until you are able to face it head on then its forever there..At least for the next seven years is there on your credit report haunting you as if it is the plague. I found this article useful and very enlightning.

    • profile image

      Kelli Davis 

      6 years ago

      I liked how they explained what the different kinds of expenses are. Also the fist paragraph was totally me, I avoid bills like they are the plague and they have gotten me into a whole lot of trouble. This artical was written very clear and was easy to understand.

    • JulietduPreez profile imageAUTHOR


      9 years ago


      Well, when I went through a tough time financially this is how I got myself to cut back and make it.


    • prasetio30 profile image


      9 years ago from malang-indonesia

      I get new information here. you have complete review about Managing Debt, Income and Savings. it really nice step. I hope it work. thanks


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)