Living below your means
Living below your means is a way to be mindful of how you spend your money. It means that you should strive to spend less than you earn. In other words, you should have money left over at the end of the month. This left over money can be used to build an emergency fund and then as savings to invest. If you do this correctly, you won't deprive yourself of the things you really need to be happy.
Establishing a household budget is an important step in living below your means as it provides visibility on income and expenses.
But living below your means means more than just balancing your budget. Being aware of the difference between what you need and what you want is fundamental.
A lot of good advice can be found on the internet on LBYM. For instance the article "How to Live Within Your Means"[1] discusses different aspects and actions related to building a balanced budget, the perspective on spending and reducing expenses.
Maintaining a balanced budget
Individuals establish a household budget in an effort to understand their cash flow - how much they make and how much they spend. A budget is a tool that can help individuals plan for desired purchases and establish savings for reaching financial goals. Budgets are often essential for people who desire to keep spending under control.
The Bogleheads approach to developing a workable financial plan is to have a sensible household budget - one that provides for needed expenditures, discretionary pleasures, savings for big ticket items, and savings for long term retirement planning.
A list of example action points from the wikihow site[1] and others:
- Create a list of essential spending, Record all of your expenditures; fixed and flexible
- Record or estimate the income from the different sources
- Compare your income to your expenditures
- Evaluate your expenditures, and challenge them: "Watch the pennies and the dollars will look after themselves."
- Boost your income where possible
- Set saving goals and adhere to them: Save and invest a percentage of every paycheque, not what is left after expenses. Start saving early.
- Avoid credit and loans: avoid paying non-deductible interest on anything other than your home mortgage
Adjusting your perspective on spending
A list of example action points from the wikihow site[1] and others:
- Distinguish between what you want and what you need
- Don't try to keep up with the Joneses
- Change your definition of what it means to be "rich."
- Know that spending less money will not decrease your quality of life
- Be grateful for what you do have
Reducing expenses
Perhaps the most important idea underlying the Bogleheads® investment philosophy is recognizing you need to save a significant portion of income every month to have enough money for a comfortable retirement. There is no substitute for spending less than you earn. Reduce expenses and unneeded debt so you can consistently set aside a portion of earnings for decades. If you don't save enough, no amount of financial trickery will provide the returns needed for a comfortable retirement.
A list of example action points from the wikihow site[1] and others:
- Eat at home whenever you can
- Entertain at home instead of going out
- Cancel the subscriptions you don't need
- Borrow items whenever you can
- Wait for sales
- Don't ever shop without a list
- Pay "cash" for your purchases, avoid credit. Pay off your credit cards monthly.
- Wait 48 hours before making a big purchase
See also
References
- ↑ 1.0 1.1 1.2 1.3 How to Live Within Your Means (with Pictures) - wikiHow, viewed December 1, 2015
