Live Within Your Means: Spend Less Than You Make

When people say "live within your means," they usually mean "spend less than you make." In the era of easy credit (yes, it is still too easy to get credit) the mantra seems to be "get it now and pay for it later." We can only go down this path for so long before the day of reckoning comes.

Spending less than you make sounds simple enough, just don't spend more than you make. I have found that there are a few things that can derail your efforts to spend less than you make.

Debt Payments

Servicing debt is the second largest expense for most people (taxes being the first). From home to car to college to credit cards, most of the controllable expenses are to pay interest on debt. The first thing to do when you find you are in a debt hole, is stop digging. If you can't pay cash, then you don't need it. Whenever you buy something with debt you end up paying much more than the original price. I've heard it said that if it's on sale and you buy it with a credit card, then it's really not on sale.

I would suggest not trying to pay extra on debt until you can live completely within your means for a year without increasing debt. Debt payments are an expense, which drains your income. If you go crazy making debt payments and then when an unexpected expense comes along and you end up putting it on a credit card, you can end up being worse off for it.

Unexpected Expenses

No matter how well you plan, there will always be unexpected expenses. Cars break down, water heaters leak, family gets sick, things just happen. While you cannot know what and how much, you can leave a margin of safety by building up some savings. Put away a small amount on a regular basis, and only tap into it for unexpected expenses that are really a need (sales are not unexpected expenses). Having that cushion will give you peace of mind and financial confidence.

Irregular Expenses

There are some expenses that happen infrequently. These could be insurances, taxes, subscriptions, etc. While they are expected expenses, they can be easily forgotten. This can cause financial stress when they come due. I found that creating a separate account for these type of expenses really helps. You figure out how much you need to put in each month (or paycheck) and then only use that money to pay those expenses. You can also have the money in an interest bearing account

Variable Expenses

Some expenses vary month to month and can vary dramatcally by season. These are usually utilities, such as electric, gas and water. What I did to help with these expenses was pay either the average of the last 12 months or the amount of the bill, which ever was greater. Eventually you will only be paying the average. And if you round the average up to the nearest $5 or $10, then you won't have a problem when energy prices jump. My gas bill now has a 4 month credit (I could skip paying my gas bill fir 4 months).