Undoubtedly, at some point in your life, you have heard the phrase, “Living Within your Means.”
Yet, in the consumer oriented and materialistic world we live in, what does that even mean?
These days, it is all too easy to sign up for multiple credit cards with high limits. It’s also fairly easy to get approved for a mortgage which many can barely afford. Companies are very eager to have people sign up for these; in case they miss any payments and thus can collect general interest from it.
Does this qualify as “Living Within your Means?” I mean, these companies did loan you the money, so you should be able to count it as your own and spend it as you like, right??
A few years ago, if you can recall, there was a viral acronym, “YOLO” (You Only Live Once) that took the world by storm.
“I’m only on this earth for a short amount of time, so I’m going to live it however I want.”
This is the line of thinking for many, and sadly, their definition of living it however they want, involves spending copious amounts of money and putting themselves in a difficult financial situation to get out of.
After all, while you may have lived your life exactly how you wanted to in your 20’s, your priorities and/or values may change as you get into your 30’s and 40’s. At this time though, you may not be able to do what you’d like, as you have financial obligations (ie. debt) that you must fulfill from those YOLO decisions in your 20’s.
While I do believe there is merit to the “you only live once” phrase, there are ways to do that without leveraging things you can do in the future.
Bringing us full circle, the way to do that is through Living Within your Means.
At its most basic level, it is as simple as knowing how much money you make (your income), and making sure to spend less than that (your expenses) each month.
Here are five strategies to ensure you can accomplish this:
Know your Income and Expenses:
The first step is to know how much money you are making. Sure, it’s easy to know you make $50,000 per year, but what is that per paycheck? How much is actually being deposited into your bank account after taxes and any pre-tax expenses (Medical, Transportation, etc) are being taken out?
Concurrently, you must have a close idea as to how much you spend each month. Look at the past few statements on your credit card(s) to see your spending habits. Make sure to add in any expenses that you may not be able to pay on credit (ie. Rent, Utilities, etc).
Is the combination higher or lower than the paychecks you received during the month? If it’s lower, you’re in good shape. Higher, and that could be a red flag.
Separate Necessary/Discretionary Spending:
Necessary spending are the things that are absolutely needed to live on. Examples of this include Rent, Utilities, Groceries, Cell Phone, Medical Expenses, and Automobile Costs (if you own one).
Discretionary spending is all you’re other expenses. These include all Entertainment, Shopping, Eating at Restaurants, Travel, Gifts, etc.
Generally, it is much tougher to lower Necessary expenses than Discretionary expenses. Not saying it can’t be done, but usually lowering Discretionary spending is a bit easier, though not without its sacrifices. Knowing the difference between the two can help identify areas where you may not need to spend as much.
Make a Budget:
Now that you know your monthly income and expenses, make your budget and try to stick with it. Your total budget, at minimum, should be equal to how much income is deposited into your bank account. This way you can make sure to have enough money on hand to cover expenses, and not have to take on debt.
Any extra is considered savings which can help pay for unexpected expenses, or be saved and invested. Having a budget that you can baseline against is a great way to measure monthly progress.
If you go over in some categories, see if there are other categories where you can offset. Or if it’s not possible to offset, remember during the next month that you went over your budget and try to be under to make up for it.
Pay Expenses in Cash or ALWAYS pay off credit cards each month:
If you struggle with spending too much money on a credit card, one common strategy is to pay all expenses that you can with cash. The feeling of having physical cash leave your hand is a very powerful one and sometimes makes you think twice about buying certain things.
If you are able to handle credit card spending, this is also a great way to go, with one major condition. You MUST pay off your balance every month, to ensure that no debt is incurred. At absurdly high interest rates, credit card debt can be very tough to get out of.
In addition, many credit cards offer rewards such as cash back, or travel points. This is a great way to take advantage of spending on credit cards. Don’t pay credit card companies, make them pay you!
Have the right Attitude/Mindset:
Lastly, having the right attitude is essential. I’ve found this to not only be true in regards to your Personal Finances, but also for life in general.
Try not to think of cutting expenses as depriving yourself. Try to think of fun ideas around your house or city you can do that may not cost as much, where you can have just as good of a time. In addition, have a long term goal in mind of where you want to be. Think of the good things from sticking to your budget and how it will feel once you have accomplished your goal.
Positivity and good thoughts can do wonders; with your Finances, it’s no different!
If you can do this and buy into it consistently, it means you are saving at least some money each month. With that, you’ve just taken the first step to Financial Independence! Depending on how much you save, is how soon you will be able to reach it.
Feel free to share any other strategies you may have in the comments!