Even when you are debt free, that does not necessarily mean you are a financial success. Although we are not belittling the experience that comes with debt free living, you have to understand that you journey towards a successful financial life is far from over. You have accomplished so much by getting rid of your debt – that is for certain. However, that is not enough if you really want to be like one of the self made millionaires out there.
There are many things that you can do to be a financial success. You can start earning more, invest in profitable ventures and similar projects. However, you need to understand that that amount of money coming in is not really the secret. The key to be a real success in your finances is to live below your means.
Reasons why your expenses must be smaller than your income
The foremost reason why you want to live below your means is because you want to have a successful financial life. A couple of weeks back, we published an article on this website about how you can be a financial success. It basically tells you how the wealthy got be where they are. Among the traits and practices that you will find there, nothing is more important than learning how to spend below what you are earning.
Take note that we are stressing the word “below.” In the past, living within your means was deemed wise. However, after the recession, that practice is no longer enough. Now you have to seriously consider how you can cut back on your expenses so that it is significantly below what you are currently earning. This habit is important because no matter how much you earn, you will always have some form of savings. If you spend within your limits, you usually don’t have enough money to put aside. That is the real purpose behind this financial habit. You need to have money to save.
There are also several reasons why living below your means is necessary. Here are some of the reasons that could encourage you to start implementing this practice in your life.
To save for your retirement. One of the important reasons to save is for the time when you retire. People today are blessed with a long life – averaging 80 to 85 years. If you retire at the age of 65, you still have 15 to 20 years to live. If you want your retirement to be devoid of work, you may want to save up enough so you have money to spend during this period.
To prepare for an emergency. Your emergency fund is another important reason to live below your means. You don’t know what will happen in the future and that means you should be prepared for any event that will require some funding. It can be someone in the family getting sick or the A/C in the house needing repairs. Saving for these instances will keep you from having to borrow money to pay for them.
To get used to frugality. Living below your means is a great way to define frugality. Sometimes, a sudden job loss or an accident will force you to live frugally for awhile or even for a long time. If this is the case, you may want to get used to it as early as you can. At least, when the time comes, you don’t have to make too many hard adjustments.
To start pursuing your dreams. In most cases, your savings are a means to reach your financial goals. It can be a home or a business that you want to start. Whatever that is, living below your means will give you the funding to do just that.
You may have other reasons to live below your means and whatever that is, use it to fuel your drive to do so.
How to start lowering your expenses so it is below your income
If you want to start living within your means, you need to do two things: track your spending and save a portion of your money. That is the whole process that you have to go through.
Step 1: Know how much money is coming in.
Of course, you need to know what you need to change first. That means you have to analyze your finances – from your income to your expenses. Make sure you take note of your net income.
Set 2: Identify where your money goes to.
The next step is to list the expenses that you make every month. It helps if you track the actual expenses that you make for one month. That will give you a realistic list of where your money is being spent.
Step 3: Calculate your financial standing.
When you have both income and expenses, get the latter and deduct it from the former. That will give you an idea whether you are living within your means or not. If you are, you still need to make some cutbacks so you are living below your means. If you are not, you need to make more significant changes in your lifestyle.
Step 4: Determine how much savings you will target.
To give you an idea regarding the amount that you should be using for your expenses, you may want to determine your saving goals. That way, you will have an idea how much your expenses should decrease.
Suze Orman, a prominent financial guru, promotes the idea of living below your means. However, she is very clear in her advise that you should do so but within what you need. There is no sense in restricting your entertainment expenses if you don’t have to. Limit your expense but within reason. You can use one of the tools that she has on the website, SuzeOrman.com to help you take better control of your finances.
Here’s a video of her explaining why she believes you should live below your means instead of just living within it.