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What is Living Within Your Means and Why Is It Important?
We’ve all heard the advice, “Don’t spend money you don’t have.” This saying is tried and true for a reason. The concept of living within your means is quite simple. In essence, the definition of this term means you are spending and saving an amount of money that is less or equal to your income. While this may not seem difficult, a recent Forbes article stated that according to a 2023 survey, 78% of Americans report that they are living paycheck to paycheck.
Unfortunately, living outside of one’s means has been referred to as “the classic American mistake.” The reasons why Americans are so susceptible to living outside of their means happen for a variety of reasons. From the over-inundation of messages from the media to societal expectations, overspending can be a slippery slope.
However, living within your means is an important life skill to harness and continue to improve upon. Living within your means is an important life habit for several reasons:
- Financial Stability
- Planning
- Avoiding Debt
While it may seem satisfying in the moment to make a big purchase, have an expensive dinner or to take a lavish vacation, financial instability can be incredibly stressful. Furthermore, financial instability can bleed into other areas of our lives from our relationships to our careers and even our mental health.
Secondly, living outside of one’s means makes it incredibly difficult to make solid plans for the future. According to Charles Schwab’s recent list of 8 Keys to Good Financial Planning, managing your cash flow was near the top of the list! In order to plan, you need to have a solid understanding of just how much money is going out and coming in.
Debt avoidance is incredibly important. If you find yourself spending lots of money on expenses that are unnecessary, you will find that you have no leftover funds for when expenses are necessary. This can easily lead to taking out loans such as personal loans, car title loans or payday loans, or putting large sums of money on high interest credit cards.
Overall, living within your means helps to reduce stress. Forbes recently referred to money-related stress as “The Silent Strain” and detailed how over 48% of Americans reported trouble sleeping as a result of money-related stress.
In good news, you don’t need to be a Rockefeller in order to live within your means -even in today’s economy! It is completely possible to live within your means as an ordinary consumer.
Laying the Groundwork: Budgeting and Planning
The first step in living within your means is to budget and plan. When creating a budget, you may find it useful to simply spend one month tracking your expenses. Consider letting your SmartPhone do the work for you and utilizing a budget-tracking app. Apps such as YNAB (You Need a Budget), Empower Personal Dashboard, Monarch Money, and Goodbudget are popular today amongst consumers.
Once you have a solid understanding of what you are spending money on, you can begin to comb through your expenses and determine your “wants” versus your “needs.” There are monthly expenses that are non-negotiable – rent or mortgage payments, grocery spending and gas and transportation costs. These costs must happen each month in order for us to live our lives. However, negotiable expenses such as your dining out cost or entertainment budget can be adjusted to fit the needs of your current life stage and help you to achieve your goals.
A common misconception is that budgeting does not mean eliminating all fun expenses. Rather, budgeting helps you to plan to accommodate these expenses and to adjust as needed.
The 50 30 20 Rule
After you have clearly established how much money you’re bringing in and just exactly how much you have to spare, you may want to incorporate the 50 /30/ 20 rule. The essence of this rule is that you put 50% of your income toward your needs, 20% towards your savings and 30% towards your wants.
While there are many budgeting rules in existence, and you may have specific life needs that could pull from each category, this is just an example of one way to manage your funds!
Life Habits to Incorporate to Live Within Your Means
After you have carefully planned and budgeted for your financial future, there are some additional steps that you can take in order to make living within your means part of your everyday life. For starters, you may want to consider:
- Avoid impulse purchases
- Saving regularly
- Increasing income
- Limiting debt
Impulse purchases are incredibly tempting. In fact, they are designed to be tempting. If you have ever stood in the checkout line of a store, you may have noticed the tantalizing items that stores purposefully place in an area where people may be waiting for an extended period of time. However, there are several ways to avoid these temptations. You can sidestep these pitfalls by paying with cash, leaving your credit cards at home, or ordering pick up from stores and having the order brought out to your car.
Another pro tip is to save regularly. Even if you are not saving for anything in particular, it is still good to incorporate saving into your life. This provides a safety net that will come in handy should you splurge on a purchase and then need money for necessary expenses. Saving regularly will help you to avoid debt.
Just as increasing your safety net of savings will help you to live within your means, increasing your monthly income will also help. By picking up a side job and making some extra cash each week, you are increasing your net income and thereby giving yourself more flexibility with your budget and planning.
Limiting your overall debt is another great way to ensure you are living within your means. It is human nature to get sidetracked and stray away from a set plan. However, debt makes it even more and more difficult to get back on track. The average credit card interest rate reported in 2023 was 22.8%. This whopping number makes it increasingly difficult to pay off debt each month and incredibly easy to live outside of one’s own means. Living within your means is simple! There are strategies, tips and tricks that you can incorporate in order to live within your means and set up your life for overall financial success.
