Put simply, “Living within your means” refers to surviving on what resources you have available to you at all times. Means usually, and in this article as well, refers to money. If we don’t find a way to balance how we spend, we can find ourselves in an extremely uncomfortable situation.

Real talk: many people start their independent lives with little to no clue on how to handle their finances. The things that they took for granted growing up and being provided for become a stark reality as they have to scrape to retain what used to be their standard of living. This culture shock can have long-lasting impacts on a person’s life while they figure out their way forward.

The fact is, there are so many things to consider that this article could become its own novel. Hopefully, we can give you some beginner’s advice on forming habits that can help you establish a foundation you can build from! Understand that there is a lot of information we are going to be sharing. Not everything will apply right away, so take from it what you will.

TYPES OF INCOME

To start, let’s figure out how somebody even makes money. There are three categories of income: Active, Passive, and Portfolio.

Active Income is money that is earned, usually through a job. It will pay money either through a salary or an hourly wage.

An hourly wage is money paid depending on the number of hours worked. If the person is working a full-time job, the standard is 8 hours a day or 40 hours a week. The benefit here is more hours in means more money made. Though, missing a day of work could deprive you of the money you’d make for that day.

A salary is a set amount of money paid out over a certain period of time regardless of the number of hours worked. The upside being that you know how much you’re making, while the downside is you could work far more hours and make less than somebody being paid hourly.

Passive incomes are things that involve little effort on your part. Money earned from rental properties or interests gained from bank accounts are examples of passive income.

Finally, portfolio income is money earned through investments such as stocks, bonds, and cryptocurrency. This article will not be going over the specifics of portfolios.

DETERMINING CASH FLOW

It’s easy to say, “I make X amount of money every month” and leave it at that. However, people who focus solely on what they make tend to leave out the details on what they spend. No matter how much money a person makes, they will find a way to spend it.

One method to know how much is actually made or is actually available is a monthly comparison of one’s income versus their essential outcome. If this is nailed down, then we know roughly how much is actually available for other things.

Many consider the following bills to be essential to living a standard lifestyle: Food, Electricity, Water, Gas, Transportation, Rent/Mortgage, Insurance, and Internet/Phone.

Prepare for math!

Let’s say we make $10 an hour at our full time job. So, we make $400 a week after working 40 hours. This equates to $1600 a month after working 4 weeks.

$10 hourly / $400 weekly / $1600 monthly / $19,200 yearly (with no paid vacations)

Ah, but there’s one more important detail we didn’t account for: TAX! For the purpose of this exercise, let’s put the income tax at 25%. The tax is generally applied after money is earned, so our income will look more like this:

$7.50 hourly / $300 weekly / $1200 monthly / $14,400 yearly

Please note that income tax changes based on where somebody lives. For the purposes of this exercise, we’ll focus on it being 25% on a monthly basis. Also note that the cost of living can be dramatically different depending on where somebody is living. Don’t get too caught up on these specific numbers… this is an exercise.

Now let’s look at our essential purchases:

$400 rent monthly

$200 food monthly

$150 utilities monthly (water/gas/electricity)

$150 car insurance monthly

$100 fuel ($25 weekly)

$100 phone/internet

Essentials total: $1100

So, after all is said and done, we have $1100 required spending taken away from our $1200 monthly income leaving us with $100 dollars to use on incidentals.

Shocking, right? This is the unfortunate reality for people entering the workforce for the first time. This is a stark view on the essentials. The actual cost of living is a lot more varied. Sometimes utilities are included with the rent. Sometimes we find ways to spend a lot less on food, or don’t have a vehicle to drive so gas isn’t as factor.

Living within your means includes finding ways to cut down on overall costs so you can comfortably exist with the money you have.

EMERGENCY FUND

Let’s step away from the math for a moment and explore a critical part of maintaining one’s means while dealing with life’s sudden setbacks: establishing an emergency fund.

An emergency fund is a substantial amount of money set aside for the sole purpose of addressing emergency situations. These emergencies can be anything from having to purchase airplane tickets to attend a funeral to paying the rent for several months after getting suddenly laid off. One could also use it to pay for a critical repair in a home or a vehicle.

Regardless of the specific reason, this money should be reserved for unusual events that are disrupting one’s normal quality of life. It shouldn’t be used for routine expenses like buying gas or groceries.

Generally speaking, a solid emergency fund is 3-6 months of one’s standard monthly income. Don’t let this discourage you, though. Any amount set aside for emergencies is worth the effort. This can be difficult to establish when somebody is first starting out, though, with time and effort, it is possible to make a reality. Don’t forget to refill this fund after it has been tapped into. Life can happen all at once and this is easier said than done, but the principle of an emergency fund can be vital to keeping oneself financially secure.

Consider dedicating a portion of any leftover money to this effort until you have a comfortable amount set aside. Also, don’t forget to re-evaluate this amount as your financial situation changes.

TAKE IT TO THE BANK

We understand the appeal of hiding giant piles of cash in your mattress or burying jars of coins in your backyard; however, people start asking questions when you’re pulling currency out of a muddy jar while you’re buying groceries.

It’s a fact that in today’s world, people are using banks and other digital means to store their hard earned money. There are benefits to this, such as quick withdrawals, easy traceability, and accruing interest rates, though there are dangers as well. Some banking accounts have specific rules when they are set up, such as minimum account balances, maintenance fees, or overdraft fees.  

These requirements seem easy to maintain, and they usually are for the fiscally responsible. However, they can add up quickly. The average overdraft fee in the US is $33. An overdraft fee will usually occur when you have insufficient funds in your account.

This can make a tough situation even worse as you’re now paying for something with money you literally don’t have. Also, this can ultimately impact your overall credit score. Be very aware of how much money you have available at any one time.

A checkbook is a very handy tool for paying bills; though remember that each check is cashed out sometime after it is written. Usually, this takes several days for the funds to be taken out, and if you overspend during that period, you could ‘bounce’ a check by not having enough money to cover the expense. This, too, will impact your credit.

Just because you have more checks doesn’t mean you have the money to use them, so be wise with them.

Lastly, maintenance fees are charged to maintain the presence of a checking or savings account. These fees are averaging $14 monthly in 2022, though a lot of banks are not charging any maintenance fees these days.  Left alone long enough, these fees can chip away at an account that is being neglected, so be aware of what you are working with when you set up an account with a bank.

HABIT SPENDING

Humans are creatures of habit. We have rituals in place that we perform over and over again because it brings us comfort, a sense of normalcy, or the belief that our day cannot be complete without x, y, or z occurring.

Have you ever heard somebody say “I can’t start my day until I’ve had my coffee?” It seems like an innocent enough statement at the start, but let’s break this down a bit more.

Let’s say, every day that person goes to work, they stop at the gas station and purchase a coffee for five dollars. It’s JUST $5… it’s not that big of a deal… in isolation. However, we’re talking about Every. Single. Day.

But what about the weekends? They wouldn’t be working on the weekends! Fine. Fair observation. Let’s take those out of the equation.

So, Monday thru Friday, they purchase a $5 coffee every day. That is $25 a week or $100 every month. That is $1200 every year that this person is spending on coffee alone!

This type of spending can apply to many things we don’t even realize. Cigarettes, alcohol, trading cards, video games, energy drinks, and fast food are all good examples of habit spending.

Fast food, while convenient, is extremely expensive in the long run. If fast food is a part of our daily spending habits it can ramp up exponentially. Not to mention, every meal provided by fast food can result in groceries that go bad due to expiration.

DEBT

Debt can be a frightening and overwhelming thing. If managed improperly, it can seem like an impossible obstacle we are incapable of overcoming. But it doesn’t have to be a bad thing.

Debt is commonly a way to owe money that one can pay off over time instead of all at once. It can be incredibly useful for building up credit and making foundational purchases while getting set up for success. However, it should always be factored into the whole game plan, before accepting any type of debt long-term.

We did not identify debt as an outgoing expense because, until debt is accepted, it is not required. However, once a debt is established, it becomes an essential outgoing payment until it’s resolved.

How you pay off that debt is up to you. For example, many car lots can set up 36-month or 72-month car loans that reduce the overall monthly requirement. The same concept can go for houses where you can get 15-year or 30-year loans. Be aware that the smaller amount of time will usually result in higher payment totals, so go with what you are comfortable with.

Interest rates are also an important thing to evaluate when managing debt. High interest rates can snowball into much larger problems if they are neglected.

Let’s say we have a $1000 loan with a 10% monthly interest rate. That means 10% of the amount owed is tacked on, so not only will credit be impacted for missed payments, but the amount will increase substantially over time.

To put it in perspective:

Month 1: $1100 (1000+100)

Month 2: $1210 (1100+110)

Month 3: $1331 (1210+121)

Month 4: $1464.10 (1331+133.10)

So, ensure, at the very minimum, you are paying off the interest. Otherwise, you will lose ground quickly. To be fair, the example above is an extreme example of a debt and you should probably shop around before signing up for whatever they were offering.

In a pinch, focusing down a smaller debt to free up some income can go a long way in helping stabilize your means. Just make sure your limits before entering into a new debt.

PAY YOURSELF

Another way to live within your means is to learning how to do things yourself instead of paying others to do it for you.  Most things in life that we take for granted are creature comforts. Instead of having somebody do the landscaping on your property, roll your sleeves up and pull some weeds. Is the car’s oil change coming due? Knock it out yourself and save a buck or two. Is the sink clogged? Did the dishwasher stop heating? Do some troubleshooting and fix it for cheap.

Let’s take a deeper look at that dishwasher scenario. Let’s say, the dishwasher itself costs $500 to replace. You could have a professional come out and troubleshoot it for you. The average repair costs $250, which is half the value of the entire machine.

Or you could tap the internet for information! With some research, you’d find that the heating element broke in half and the part itself costs $40. One quick tutorial video would show that you could swap it out yourself in ten minutes. All in all, you saved $210!

Beware of overconfidence, though. Professionals are professionals for a reason. Some repairs or projects are legitimately beyond our ability to handle and should not be approached unless properly assessed. Doing your own electrical work may not only cost you thousands of extra dollars if something is damaged, but it could kill you if done improperly.

If the job is too dangerous or complicated, don’t be afraid to call for help.

Competitive marketing is extremely important when trying to find the right person for the job. Take some time to shop around to different providers and find the best option to meet your need. Do some research and find out what prices are reasonable for what you are asking.

It will always be okay to tell somebody that you will find help elsewhere. It’s a business; they’ll get over it.

INSURANCE ASSURANCE

Life can hit us hard when we least expect it. Knowing what we have available can help us mitigate some of the stress. When the problems seem unsolvable, we can find ourselves overwhelmed. So, it’s vitally important that we know what options are available to us in order to respond accordingly.

Insurance is a common method to gain some security in hard times. For example, many car insurance companies will offer free taxi and tow services when one of their clients is stranded and trying to find a way home.

In some ways, they’ll cover most if not all of a bill when a car is totaled. Health insurance can help prevent some of the astronomical fees that come with medical care.

FOCUS ON THE BIGGER PICTURE

Remember that the goal of living within our means is to establish a stable financial situation that allows us to live comfortably and meet all of our basic needs. With time, effort, and discipline, it is possible to achieve many of the things you want to accomplish.

A common idiom “Keeping Up With the Joneses” references that rich family down the street that is always buying and showing off the latest gadget, boat, car, house, etc. That flashy lifestyle is not the norm. However, jealousy, peer pressure or social status convinces us to make frivolous purchases we cannot afford. Don’t measure success on what others have done. Celebrate success based on what you determine it to be.

If you find yourself overspending, create a budget and analyze where your money is going. Adjust your habits. Don’t eat out so often. Find hobbies that are low cost. Invest in vehicles with better fuel efficiency. Find ways to increase your assets while reducing your liabilities.

If you have several debts chipping away at your monthly income, focus on paying them off one by one. As one debt is paid off, take the freed up income and focus down the next. It doesn’t have to be paid off today, but a concerted effort can take literal years off the expected time it would normally take to pay off certain debts.

In the end, there is no clear path toward living within one’s means. It’s a constantly shifting landscape that requires constantly shifting focus. But, attention to detail, applied willpower, and savvy practices can and will help you achieve what you never thought possible.

Good luck out there. You can make it.