“Last year I moved out of my parents’ house, and now I’m finding it hard to make ends meet. When I lived with them, all my income went into clothes and entertainment, because I had no bills to pay. Now I constantly have to borrow from my mother, and I have a credit card bill that I don’t know how I’m going to pay off. How can I live within my means?”
Living within your means can mean different things to different people. Some persons think they are doing okay financially if their salary can afford them the credit to buy whatever they desire, and they can meet their debt payments every month. Others are happy if their income can pay for all their necessities, but aren’t too worried if there’s not much left behind for savings.
In reality, living within your means is being able to establish an optimal balance between your income, expenditure and savings to ensure that you can meet your financial objectives without getting trapped in unnecessary debt. In other words ‘your means’ cannot just be about your current spending needs, it has to take into consideration being able to fund your goals for the future.
How can we manage our money to ensure that we can meet our current obligations and still save for the future?
There are two main steps – you have to decide between needs and wants, and you have to be able to allocate your income properly with a budget.
Deciding Between Needs and Wants
Everyone needs some basic things for survival – food, clothing, and shelter. Some form of transportation to get all of these things could also be considered a necessity. The difficulty arises when we can’t differentiate between true needs and wants. Wants are not necessary for our survival and we tend to waste money on our wants versus our needs.
For example, you need to eat food, but you want to dine at the ritzy Japanese restaurant that everyone is talking about. You need to wear shoes, but you may want to buy a Jimmy Choo original because it’s the latest fashion. You need a car to get to work on time, but you decide you want a brand new SUV because all your neighbours have high-end vehicles.
When you’re faced with a shopping decision, you can control your spending by asking yourself: “Is this item a ‘need’ or a ‘want’?”, before you make the purchase. It’s probably a ‘want’ if you can put off buying it, you can find a less expensive option, or you already own a similar item. You will know the purchase is a ‘need’ if your survival depends on it.
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Now I’m not saying that you should not aspire to live an expensive lifestyle if that is one of your goals. The question is: Can your current income afford you that lifestyle? Using a budget effectively can help you to decide.
Budgeting to Balance Income, Spending and Savings
A budget is the basic foundation to successful money management. It allows you to keep track of your income and your expenditure, and gives you written plan of how you choose to spend your money every month. A proper budget will help you to plan for expenses that are due periodically during the year, and can help to provide for emergencies that could arise.
The first step in budgeting is being honest about how you are actually spending your money now. Most people don’t have a clue about how much money they really use until they start keeping a daily record. I suggest that for one month you walk with a notebook and write down what you do with every dollar. At the end of the month, place your purchases into different categories: household expenses, entertainment, debt repayment, insurance, transportation, personal care, food, health care. Consider how much of your money went to buy necessities and how much of your purchases you could have lived without.
The next step is to use this information to plan how you wish to allocate your income among these expenses. Your first expense should be to pay yourself, so include your savings in your budget. Give yourself spending limits for the non-essential items. For example, if you decide that entertainment is a high priority item, you will have to cut back on other expenses, or try to earn more, in order to achieve a balanced budget.
Remember that ‘living within your means’ should also take into account your financial objectives. You cannot spend today without a thought for tomorrow’s needs. Seek assistance from a financial advisor to help you plan for your future money goals.
Copyright © 2007 Cherryl Hanson Simpson. No reproduction without written consent.
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Originally published in The Daily Observer, February 29, 2007
Cherryl is a financial columnist, consultant and coach. See more of her work at www.financiallyfreenetwork.com and www.financiallysmartonline.com. Contact Cherryl