Living Just Within Your Means
The expression, “to live within your means” gets thrown around a lot, but what does it really mean?
If your “means” is your income, then it could encompass everyone from people just getting by each month, to those who have substantial savings.
The first group we often call those that “live paycheck to paycheck.” Their entire earnings goes right out the door each month to cover their bills. Without any wiggle room for unexpected expenses, they are at risk for going into debt every month.
What would it mean for the paycheck to paycheck group to live below their means?
They would have that extra bit each month to save. From building an emergency fund, to saving up for a car or other large expense, it really turns the tables on their economic situation.
“Well of course I want that, but I have no extra room in the budget. I’ve already cut out everything!”
Paycheck to Paycheck Cycle
Here are the top 5 reasons I see that people get trapped in this cycle of barely making ends meet:
1. They finance too much. The bank will loan you more money than you should borrow. I know it is easy to trust their judgment of how much car or house you can afford. Maybe they are offering you a great rate on a home equity loan to remodel. You think to yourself that since they are looking at your finances and are experts, that you can trust their judgment. The problem is that they are offering an amount equal to the maximum you are permitted to borrow based on current income to debt ratio. Just because you CAN borrow that amount doesn’t mean you SHOULD.
(Car salesmen and real estate agents are also quick to steer you toward what you can just afford at the maximum amount you have been approved.)
2. They count chickens before they hatch. You will save yourself a lot of stress and heartache by not putting money in your plan that you have not yet received. I’m sorry to be a pessimist, but I have had to learn the hard way many times. Maybe you always get a big tax return or a bonus, or your cousin promised they will pay you back the thousand dollars they borrowed next week after they get paid. Don’t count that money until it is in your account (and any checks have cleared). Life is full of unexpected things that can change the course we are on very fast. Getting stuck in a hole because you were sure there would be a way across it when you got there is not a wise plan.
3. They spend out of frustration or hopelessness. I’ve been there. Believe me when I say I get it. You are trying so hard to get your budget on track and have cut out all extras. Then your hot water heater breaks. You are so frustrated at having to spend hundreds of dollars on it when you haven’t even allowed yourself a dinner out in months. So while you are charging hundreds of dollars for the water heater anyway, you give yourself a break and eat out on the way home. And then that felt good to do something fun for a change so you buy a couple things for the house too. “Might as well — what’s another hundred dollars when you just spent $800 on the heater?”
4. An unexpected turn of events pushed them into the hole. Again, I can relate. I have been through job layoffs several times, an unexpected pregnancy, a divorce, having to leave a successful career due to major illness, having a house go down in value, and paying a fortune for medical and dental bills due to lack of insurance. Each time I felt like someone pulled the rug out from under me. Each time I had to start over and get out of that hole.
5. They underestimate what they need to earn. There’s a point at which the math simply won’t work. A point where you have to get very real and honest with yourself about your earnings. Maybe you have been operating a business that hasn’t taken off how you hoped. Maybe you are using student loans to pay for essentials you can’t otherwise afford. Perhaps you really wanted to have your family live on one income, but it isn’t quite enough anymore to cover the bills. Or you may be stuck in a dead end or low paying job you had to take after being laid off a year ago. When you can no longer stretch the money any more to cover expenses, you are at the point where you have to change the income.
So, how do you break the paycheck to paycheck cycle? How can you ever get ahead when you are constantly bombarded with unexpected expenses?
In part 2, “How to Live Below Your Means,” I suggest practical solutions that I have found helpful in getting out and moving forward.