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The First Rule to Financial Freedom: Living Within Your Means Thumbnail

The First Rule to Financial Freedom: Living Within Your Means


Achieving financial freedom doesn't require being a millionaire or working multiple jobs. Anyone can be free financially, but it requires living within your means.

Spending less money than you make and being conscientious about how you spend your money is the key to reaching your financial goals.

Related Article | The Finance Dictionary: Learn the jargon your Finance friends speak!

What Does "Living Within Your Means" Mean?

Spending less money than you make is living within your means. It takes proper budgeting and discipline to keep your living expenses and spending habits below the money you earn. But this helps you achieve better overall financial health.

Why Is Living Within Your Means Important?

Living within your means allows you to have better financial health and save for financial goals.

When you don't spend more money than you make, you can handle things like unexpected expenses and large purchases. It also helps you build wealth.

Tips on How To Live Within Your Means

It can feel challenging to live within your means, especially with the higher cost of living causing increased monthly expenses. Here are nine ways to improve your financial well-being and live within your means.

Know Your Income and Expenses

Your "means" is your income, and knowing how much you make is the first step to avoid overspending.

This doesn't mean knowing your annual salary or hourly rate. You must know, to the penny, how much money you bring home weekly, bi-weekly, or monthly to create a budget that works.

Next, you must know your expenses. This includes all monthly expenses, both fixed and variable. Fixed expenses are those you have every month, such as housing, transportation, utilities, insurance, and basic food and clothing.

Variable expenses change monthly, including credit card debt, dining out, entertainment, medical expenses, and gifts. If your expenses exceed your income, look for ways to cut back.

Create a Realistic Budget

You can stick to a realistic budget without feeling like you must sacrifice, so don't go overboard when creating your budget.

Leave room for 'fun spending' while ensuring you have enough money to cover necessary expenses, plus money for short and long-term savings.

There's no right or wrong way to create a budget, as long as you can stick to it and it allocates funds to fixed expenses, variable spending, and savings, including retirement savings.

You can use a budgeting app, software program, or pen and paper, whichever method you'll use the most.

Related Article | The Ultimate Budgeting Guide for Immigrants

Track Your Expenses

It's important to track your expenses when using a budget. Knowing how much you spend helps determine if you need to cut back on any areas. If you don't have money left over each month, you're likely living beyond your means.

If tracking your expenses or spending feels overwhelming, consider using an app that automatically syncs to your bank accounts and tallies your spending, such as Mint or YNAB.

Prioritize Needs Over Wants

It can feel like everything is a 'need,' but if you look at it realistically, many things you think you 'need' to spend money on are wants and unnecessary.

Prioritizing needs over wants ensures you always have enough money for the necessities and won't have to use credit cards to afford the basics.

Avoid Impulse Buying

Impulse buys epitomize giving in to wants or items you don't need. Rather than giving in to each whim, use the 48-hour rule. If the thing you want wasn't on your list or isn't a need, put it off for 48 hours.

If it's still on your mind after that time, work the purchase into your budget. This ensures you don't spend money you don't have and avoid using credit cards to buy items you cannot afford.

Limit Credit Card Usage

Using credit cards to pay fixed expenses is the opposite of living within your means. Credit cards are loans that allow you to use money you don't have, but they decrease your future funds.

They cause you to live outside your means and make it hard to set financial goals because you must spend money on interest charges to repay the debt.

Build an Emergency Fund

Having emergency funds ensures you don't have to borrow money in an emergency. It's wise to save three to six months of expenses in an emergency fund to prepare you for the worst, such as job loss or becoming ill.

If you still need to start saving money for emergencies, start with what you have, even if it's a couple hundred dollars. This can help offset minor emergencies and avoid the need to create new debt.

Look For Ways To Save Money

If you don't have savings worked into your budget, look for ways to save, including:

  • Cut back on unnecessary expenses.
  • Negotiate APRs on credit cards.
  • Determine if you can negotiate or eliminate any bills.
  • Set up direct deposit for a percentage of your pay to go to savings every payday.
  • Make grocery lists and meal plans to avoid overspending on food.

Related Article | How to Save 10000 in a Year: 10 Steps to Get Started

Practice Contentment

Sometimes, we spend money because we think it makes us happy, but material things don't bring happiness. Try to find joy in non-material things, like your family, friends, and experiences you have in your life.

Don't try to keep up with others. Find pleasure in the simple things and avoid spending extra cash when unnecessary.

What Are the Benefits of Living Within Means?

Living within your means gives you a solid financial future, which can create better mental health due to less financial stress.

You'll feel better overall and won't buy material things you don't need, causing clutter. You can live life to the fullest without worrying about late payments, more debt, or not having enough cash flow.

Common Traps Leading To Overspending

Knowing what causes overspending can help you be more mindful of what you can afford and help you reach your long-term goals.

  • Impulse Buying: Create lists when shopping and stick to them. If an item isn't on your list, don't buy it. Please wait until you can work it into your budget to avoid overspending or unnecessary debt.
  • Peer Pressure: Keeping up with the Joneses causes many of us to buy things we don't need. Before making a purchase, decide if you're buying this because you want it or trying to keep up with others.
  • Credit Card Debt: Credit cards make overspending easy because you swipe plastic and don't think twice about the money spent. Lock up your credit cards to avoid using them for items you cannot afford.
  • Lack of Budgeting/Tracking: Creating a budget is one thing, but tracking your spending is another. You need to track your spending to know if you're staying within your means or spending more than your paycheck allows.
  • Lifestyle Inflation: Getting a raise or lump sum bonus isn't an invitation to spend more money or inflate your lifestyle. Instead, increase your savings by the amount of your raise or bonus so you're saving for short-term or even long-term goals.

Related Article | Ways to Prevent Lifestyle Creep

Potential Consequences of Not Living Within Your Means

Not living within your means can lead to severe consequences, including:

  • Excessive credit card debt: Too much debt can be difficult to manage and budget, leaving you without enough money for savings or other bills and goals.
  • Damaged credit score: If you live beyond your means, using credit cards or other loans, you could cause your credit score to decrease, especially if you have late payments, making it hard to achieve other financial goals.
  • Not enough retirement savings: Spending more than you can afford may leave you with less money left to contribute enough money to your retirement savings, making a solid financial future challenging.

Is It Possible to Achieve Financial Freedom by Living Within Your Means?

Living within your means is the first step to achieving financial well-being and freedom. When you spend less than you make, you have more money for savings and financial goals.

This includes short and long-term goals, such as buying a house or car, saving for college, or retirement.

Final Thoughts

Living within your means paves the way to financial freedom and success.

Everyone must find the best way to spend less than they make to ensure there is enough money for emergencies, fixed expenses, fun spending, and financial goals.

It can take a few months to get the hang of how much you should spend, but when you reach that 'sweet spot,' you'll have a better chance of financial security.