Personal finance, at present, seems to point to one direction – live below your means and start to save up. This is in relation to how people are starting to fall in love with their credit cards all over again. CNBC.com recently shared that consumers are again carrying credit card debts that total to levels seen right before the 2008 financial crisis.
An optimist would be quick to point out that this is just the effect of a resilient economy where people are confident to take on debt again. On the other hand, some would already caution you to stop spending and drastically prepare for the worst. There is really no way of knowing what tomorrow brings and in these instances, it is better to tread down the middle.
When you choose to live below your means, you are able to strike a balance between the two extremes. You put your finances in a position to be able to take on debt but at the same time, save some funds. However, you need to look at this as a lifestyle change to be more effective. As much as it can help you with short term need, being frugal does have a lot of benefits.
3 reasons to live below your means
It is better to understand why you need to practice living below budget. Here are some of the reasons to consider.
You get to have extra money
The main reason why people choose to spend below budget is to free up funds from their monthly income. This allows them to move their finances around and be more flexible with present and even unexpected needs. It is the penultimate reason people choose to take on a frugal life approach in terms of their finances. The money that you get to save can then be used for various reasons with the goal of strengthening your finances.
You get to exercise your creativity
Nothing says living below your means than home cooked meals and movie nights at home with homemade popcorns on hand. Even camping with the children out in the backyard can be a great way to spend quality time with minimal expenses. When you live below your means, you are forced to think and come up with creative ways how to save money. As you continue to do this, it becomes a habit and a way of life. You stand to benefit from this approach as it can them ripple out to other areas of life. The more creative you get, the more efficient you become in managing your finances.
You gain a different perspective on life
Happiness is objective and is dependent on several factors that shaped your upbringing. If you find happiness in buying clothes, that is the environment that you grew up in. If going to the park or the beach with family is what makes you happy then you must have been doing a lot of traveling when you were a child.
As you take on a frugal lifestyle and live below your budget, you are putting yourself in a situation where you need to adjust. Not only financially but emotionally and socially. If happiness comes in the form of new clothing, maybe you can upgrade some of your wardrobe with do-it-yourself styling. You can even make home improvements like painting your room all on your own.
What will you do with the extra money
These are just some of the most obvious reasons why you would live below your means. These all support your main goal of being able to save up some extra money from your income. Once you have that, the next question you might ask yourself is what to do with the money. Here are some smart financial decisions to consider with that extra money in your budget.
You can build your reserve fund
As mentioned earlier, there is no way to tell what will happen tomorrow. The fear being expressed by people with the alarming credit card debt is because it can be a prelude to another crisis. Then again, they might just be blowing things out of proportion. The best way to plan for the worst and be proactive with your finances is to strengthen your reserve funds.
This fund consists of your emergency as well as rainy day fund. In theory, these two works in almost similar fashion. They are your cushion when you find yourself faced with unexpected life emergencies that directly affects your fund. This can include losing your job, getting sick, or even finding out that the roof needs repairs. When this happens, you have money you can use to get you through without getting in debt as explained by Theweek.com.
You can invest it
One of the smartest things you can do to help your future self is to invest your money as early as possible. The sooner you are able to do this (and the more frequent), the bigger your fund gets. This is because compound interest helps grow your money in the background. This is one of the best decisions you can make when you start to live below your means. Use the money you save and invest it for future need.
You can pay off your debts more aggressively
Debt payment is as common nowadays as getting a bite to eat. There are also pros and cons on the topic of debt where people are divided if it is something worth looking into or if consumers are better off avoiding it at all cost. Regardless of your view of debt, repayment is and should always be part of the whole equation.
When you choose to live below your means, the money you are able to save up can be used to pay off your debts in a more aggressive manner. This is because, at the very least, you should be making minimum payments on your financial obligations. When you have extra funds in your budget, you can then choose which ones to pay more so you can pay them off faster.
In these types of decisions, one of the factors you need to consider needs to be the interest rate on your loans. Choose to be more aggressive with debt that has high interest rates. Oftentimes, your credit cards would have high rates being unsecured loans. With this, it is a good idea to pay down your cards with any extra funds that you get. Doing so gives you the chance to save money you would otherwise pay for interest payment.
You can save for a vacation
There are people who feel guilty for taking a vacation because of the amount of money they spend especially when they will charge that amount. What you can do to feel less guilty is to save up for that trip. This way, you would feel less guilty about it because you put in the effort to save up for the vacation.
Choosing to live below your means can help you manage your finances better. As it helps you free up some funds in your budget, it makes money management a bit easier. Your financial decisions become a lot more flexible and able to address unexpected.