When you’re just starting a career or adding to your family, it’s sometimes tough to stay on budget. It can also be difficult to put money aside for a rainy-day fund, vacation, retirement, children’s college costs or a down payment for a home.
How many people live within their means?
If you can’t cover your current lifestyle and all your bills with after-tax income, you're not living within your means. Without enough savings, many adults live paycheck to paycheck, which means they don’t have enough money for emergency expenses. A study done by the Federal Reserve showed that 44% of adults say they couldn’t pay for a $400 emergency expense, or they would need to borrow money or sell something to pay for it.
What does it mean to live within your means?
If you're living within your means, you have enough money to cover all expenses. By adopting a personal finance plan and sticking to it, you can know your basic needs are covered along with other financial priorities.
Living beneath your means and living within your means are similar ideas. You’re earning more money than you’re spending. This allows you to save money for your financial goals, and it also gives you a cushion in case an emergency arises and you need extra cash.
For example, Sean's monthly take-home pay is $1,000 a month. His monthly car payment is $300, his living expenses and rent are $700, and his health, car and renters insurance are $200.
Since his monthly expenses are $1,200 and his take-home pay is $1,000, Sean isn't living within his means. He’s paying more for his lifestyle and expenses than he's earning. If he were to cut spending to $900 per month, he would be living within his means.
Know your expenses
The most important tip for living within your means is to understand your cash flow. Before you set a financial goal, you should know how much money you make after taxes and understand your expenses. Some expenses are fixed, like rent/mortgage, car payments, and student loans, and others, like groceries and gas, can vary from week to week but may remain relatively steady over time. Even with fixed expenses, you can still find ways to lower them, such as getting a less-expensive apartment or finding a roommate to split the cost.
And while you may be able to anticipate your utility costs each month, things like electricity can fluctuate greatly from season to season. You can lower utility costs by cutting back on cable channels or adjusting the thermostat when you know you’ll be gone all day, and plan to budget more during winter and summer's temperature extremes. If possible, determine an average based on what you've paid in previous years so you know what to expect.
Create a budget
When you know your expenses and income, set a reasonable budget so you don’t spend more money than you make. If it looks like you need to cut back, determine the easiest places to do so.
Set financial goals
It’s hard to maintain a budget if you don’t have objectives. By making a goal of saving a certain amount a month, you’ll be more inclined to make dinner or coffee instead of dining out. You’ll know the savings will go toward a future home down payment or home repairs.
Consider talking to a financial professional
It’s important not to just make a financial plan, but to follow it. Staying on target to meet goals is how you’ll get ahead. Sometimes this is easier to do by working with a professional. Find a financial professional today, and develop a practical strategy for your financial future.