If you feel like you’re barely scraping by, you’re not alone. Seventy-eight percent of full-time workers are living paycheck to paycheck, according to a 2017 survey by CareerBuilder.
To live within your means is more than just scraping by. It’s living in a way that you can sleep at night knowing that your finances are in good shape. It includes having enough saved for immediate and long-term needs.
If there is any one thing that will bring peace and contentment into the human heart, and into the family, it is to live within our means. And if there is any one thing that is grinding and discouraging and disheartening, it is to have debts and obligations that one cannot meet – Heber J. Grant
Creating a budget is the best way to learn how to live within your means. But the simple equation of spending less than you earn is easier said than done. Emotions often overpower reason, and it’s hard to stay consistent.
The key is to create a plan, and here are seven steps you can start taking now to do that.
1. Create your why
It’s important first to understand why you want to change your financial habits. For example, would you like to get out of debt, create a savings plan, manage your money better, or save up for something you’ve had your eye on?
If you don’t have a clear-cut financial goal, it can be tough to cut back on expenses and daily luxuries. Look deep inside and figure out what your motivating factor is. Then write it down and keep it somewhere you can see it often.
2. Calculate your income
Now that you have a clear motivation, calculate how much money you bring in each month. It’s best to calculate your net income — also called your take-home pay — instead of your gross income because that’s the money that you can actually spend. Create an estimated monthly income chart so that you know what you can afford to spend each month.
This will be easy if you’re a salary worker or your hours don’t change every month. But if you’re self-employed or work varying hours, you might need to go back three to six months to get an average of what you can expect to earn each month.
3. Track your expenses
This is where your budget comes in. You need to understand where your money is going each month so that you can figure out how to cut expenses and save more money. Start with the most important expenses first like your mortgage or rent, utilities, insurance, and phone bill. Then work your way from there.
Tracking your expenses can be a tedious task, but it’s vital to your journey of learning to live within your means. To make it easier, use a budgeting tool like Mint or You Need a Budget. With these applications, you can connect your financial accounts and directly import all of them into one place. That way, you don’t have to write everything down or check multiple accounts every week.
4. Evaluate your expenses
Before I started using a budgeting tool, I did all the math in my head. I thought I was living within my means, yet my credit card balance continued to increase each month. When I sat down and looked at my expenses, I realized that I was spending a lot of money on frivolous items.
Creating a budget will help you see where your money is going and where you can cut back on expenses. Once you’ve built your budget, create an idealistic budget of how much you think is reasonable to spend for each category and try to stick with that budget. At the end of each month, you should look at your budget and see how well you did, where you can improve, and what to modify for next month.
5. Boost your income
If you’ve gone through the steps this far and are still losing money each month, you need to look into ways to boost your income. Look for a new job that pays more, try to work more overtime, or pick up a side hustle. Do whatever it takes to improve your situation.
6. Save up for purchases
Last year, my daughter underwent a major surgery, we bought a used car, and we went on a family vacation. I know it sounds overwhelming, but with a lot of budgeting and planning, we were able to pay cash for everything.
It wasn’t easy. But, in the end, we decided that it would be better for us financially if we paid with cash up front rather than pay interest. Now, you may not always be able to pay cash for big purchases like a house or graduate school. But, if you can pay cash for the smaller things that may take you a few months to save for, it’ll be better for your finances in the long run.
As you’re saving, make sure to prioritize your savings goals, so you’re not spinning your wheels.
7. Create an emergency fund
I can’t emphasize enough how important it is to have an emergency fund. It always seems like once I start thinking that I’m doing well with my finances and have a plan laid out, an unexpected major expense occurs. Maybe the car needs new tires, or your daughter broke her arm. Whatever it is, if you have an emergency fund in place, you won’t need to rely on credit cards or loans to pay it off.
Learning to live within your means can take a lot of work. It can be hard to miss out on small, daily luxuries while you’re saving for a large expense or working to pay off debt. So, it’s important to keep your eye on the ball. Remember why you decided to change your financial habits in the first place and let that drive you to success.