When you spend less money than you earn each month, you are living below your means.
A Pew Research study showed that less than 46% of respondents surveyed reported making more than they spend.
Spending less than you earn will put you on a path to financial success.
Credit cards are useful, but if you don’t use credit correctly it can lead to debt. Think of your credit card as a tool, a way to earn money, in the form of cash back and reward points and as a way to establish good credit. A credit card should not be used to purchase items you cannot afford to pay for. Ideally you do not want to carry a balance from one month to the next. Your balance should be paid in full by the due date.
Another way people get into trouble is by purchasing homes and vehicles and other big-ticket items by taking out a loan that is more than they can handle. Just because you are approved for a certain loan amount does not necessarily mean you can afford it. Banks and other lenders determine the loan amount based on your income, but they do not necessarily take into consideration the other debt you have. That is something you must think about when applying for a loan.
The same is true for leasing. You don’t want to rent a house or apartment that is more than you can comfortably afford to pay for each month after calculating in all of your other expenses.
Let’s talk about some ways you can make sure you are living within your means.
1. Create a monthly budget and stick to it. Creating a budget shows you exactly where all your money is going each month. You want to include all of your monthly expenses such as house or rent payments, utilities, loans, groceries, savings, repair and home maintenance costs, childcare and anything else that you are spending money on.
Once you have your budget setup you want to subtract your monthly expenses from your monthly income. You should have some money left over if you are budgeting correctly. If you end up spending more than you are bringing in it is time to reassess your expenses and lifestyle and decide what expenses can be eliminated or reduced.
2. Similar to a budget you want to track your spending. You can do this with a simple spreadsheet or use an app that will do the tracking for you. When you record each purchase you know where your money is going. Often you will find that much is being wasted and you can decide what is important and what is not important and make adjustments accordingly.
3. As I talked about before use your credit cards as a tool. Pay your monthly expenses using your credit card to earn cash back and reward points but be sure you pay it off in full each month. You can easily get in over your head if you use it to make purchases you cannot afford.
4. Establish an emergency fund. Ideally you should have enough saved to cover 6 months of expenses or more. An emergency fund is a place to save your money in an easily accessible location. Use it for unexpected expenses such as home and auto repairs, or if you lose your job. An easy want to ensure that you are putting money into an emergency fund is to setup an automatic transfer from your checking account into your emergency fund account. Add that payment to your budget and monthly expenses. Think of it just like any other monthly bill that you must pay. Check with your local credit union which many times pays better interest than a bank.
5. Reduce unnecessary spending. Review all your expenses. Look at things like magazine and newspaper subscriptions, gym memberships, wholesale club memberships, streaming services and cable TV, expensive cell phone plans, entertainment expenses, services like manicures, haircuts, lawn care, takeout food and coffee, clothes, household items and other things you regularly spend money on. Almost all of us can eliminate or reduce many of these expenses.
6. Consider finding a less expensive place to live. Housing and car payments are the largest monthly expense for most people. Can you downsize your home? Move to a more cost-efficient apartment? Relocate to an area with lower property taxes? Refinance if lower rates are available? Drive a less expensive vehicle? Eliminate a vehicle? These are all questions to ask yourself. And downsizing can save a huge amount of money. Even if you are just saving $100.00 a month on living expenses that adds up to $1,200 a year.
The Tech Minimalist 