How to live within your means

Living within your means isn't about restriction — it's about financial empowerment. When you’re in control of your money, you feel confident about your finances and less stressed about the future.

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By living within your means, you ensure that your spending is less or at least equal to your income. This is essential if you’d like to achieve financial security and meet your short—and long-term goals. Below, we’ll explore how to live within your means so you can take control of your finances and set the foundation for a stable future.

What does it mean to live within your means?

When you live within your means, you spend less than or equal to what you earn every month. Let’s say you bring home $10,000 per month. To live within your means, your monthly expenses — which may include your mortgage, groceries, debt payments, and savings deposits — should be less than or equal to $10,000. Discretionary expenses, which are non-essential expenses such as entertainment, subscriptions, and dining out, should be accounted for as well.

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In doing so, you’ll find it easier to avoid overspending and, in turn, steer clear of debt. You’ll also be able to save and invest your money so you can cover emergencies and build long-term wealth.

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Ultimately, living within your means gives you the peace of mind of knowing you can comfortably cover all your spending and lead your life without worrying about your finances.

How to live within your means

Living with your means takes patience and persistence. However, with the right strategies, you can easily build good money habits. To get started:  

Assess your current financial situation

First, it’s important to understand how much you earn each month after taxes and other deductions, such as health insurance, 401(k) contributions, and child support. Once you know what that figure is, it’s time to take a close look at your monthly expenses.

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While some expenses will be fixed, such as your mortgage and car payment, others, like our groceries and entertainment, will be variable and may fluctuate each month. It’s a good idea to look at your bank and credit card statements to gauge how much you spend on variable expenses each month, on average.

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After you know your monthly earnings and expenses, compare them. If you spend more than you earn, look for ways to reduce your expenses. Depending on your situation, this may mean you need to downsize, buy a more affordable car, or cook more than you dine out. Remember that your goal should be to ensure your monthly expenses are equal to – or ideally, less than your monthly income.

Create a realistic budget

A budget can help you ensure you have enough money to cover all your expenses and reduce your risk of overspending. There are several types of budgets you might want to explore, including:

• 50/30/20 budget: With the 50/30/20 budget, 50% of your income goes toward essential expenses, 30% to wants, 20% to savings and debt repayment.
• Envelope budget: The envelope budget requires you to use envelopes for various budgeting categories, like groceries and entertainment. You allocate a specific amount of money to each envelope and can only spend the cash that’s in them.
• Zero-based budget: If you opt for the zero-based budget, you assign every dollar you earn to a specific purpose. It’s a strict budget that leaves no portion of your income unaccounted for.

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Once you create a budget that works well for your spending habits and lifestyle, it’s important to stick to it so you can reap the benefits. Also, don’t be afraid to tweak your budget as your circumstances change.

Build and maintain an emergency fund

An emergency fund is a designated savings account for unexpected expenses and situations, such as medical bills, car repairs, or job loss. Ideally, you’d save at least three to six months of expenses in a high-yield savings account.

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However, the right amount depends on factors like your employment stability, household size, monthly expenses, and risk tolerance. Once you set a target savings amount, continue contributing to your emergency fund until you meet your goal. Whenever you dip into your fund, prioritize replenishing the money you withdraw.

Set SMART financial goals

SMART financial goals are specific, measurable, attainable, relevant, and time-bound. They help you design an actionable plan that puts you in a position to meet your short and long-term goals with respect to your budget.  

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SMART goals also make it easier to create a 5-year financial plan, which includes the goals you’d like to meet within the next five years, such as paying off student loan debt or funding a large home improvement project. A 5-year plan is essential if you hope to mitigate risks, gain better control of your money, and live a life you enjoy.

Live frugally

Living frugally is about being mindful of spending and prioritizing needs over wants. You're not sacrificing quality but rather enjoying simplicity and moderation to spend as little as you need to. In doing so, you create a lifestyle where you pocket much more than you spend. Some ways to cut your expenses so that you have more money for your particular goals include moving to a more affordable home, investing in energy-efficient appliances, buying generic products at the grocery store, and looking for free or low-cost entertainment options.

Avoid or pay down debt

Debt can make it more difficult for you to live within your means. Therefore, it’s worthwhile to reduce your debts or eliminate them altogether. Several debt relief strategies you might want to consider include:

• Debt consolidation: When you consolidate your debt, you roll multiple high-interest debts into a single account with one monthly payment. This works particularly well if you can secure a lower interest rate.
• Debt settlement: Debt settlement usually involves a company or debt attorney who negotiates your debts so that you can pay less than you owe and reduce your overall debt burden.
• Credit counseling: A credit counseling agency helps you build a debt repayment plan. They also negotiate with your lenders on your behalf, potentially saving you money and making you debt-free sooner.
• DIY debt strategies: The debt snowball focuses on repaying your smallest debts first to improve motivation, whereas the debt avalanche prioritizes your highest-interest debts so you can save as much as possible on interest.
  

Final thoughts

There’s no denying that living within your means is easier said than done. However, embracing your budget offers the freedom to pursue passions, achieve goals, and build a secure future.