One of the most basic pieces of personal finance advice that you are likely to get has to do with living within your means. You hear about living within your means rather regularly, and you might think that you are living within your means. But are you really?
Debt and Your Means
One of the circumstances that you have to look at honestly is your debt situation. While you might get a pass for mortgage debt, it is important to consider the way you use credit cards. If you reach the end of the month and you are unable to pay off the balance on your credit card, you are not actually living within your means.
Credit card debt is deceptive because the minimum payments make it seem as though you are doing things affordably. You may have a $3,000 balance on your credit card, but paying a $90 minimum doesn’t seem too bad. There is nothing wrong with using a credit card as part of your monthly plan, but if you can’t pay the balance off each month, you aren’t living within your means – even though you can easily afford the minimum payment.
Should You Really Buy That?
Another concern when it comes to living within your means is whether or not you should buy something. Just because you think you can afford it now doesn’t mean that it’s a good idea to make the purchase. No matter the deal you think you are getting, you might not actually be saving anything – especially if you don’t actually need or really want what your purchase.
Realize, too, that you might think you can afford something now, but it might not be so affordable down the road. Witness all the folks who participated in the housing bubble leading up to the financial crisis of 2008. Many bought homes they would not otherwise have been able to afford with teaser interest rates and interest only loans. It appeared that they could afford the home, and then all of a sudden, a few years later, it turned out they couldn’t.
Changing circumstances can also affect your ability to continue to afford something. Amassing financial obligations that take you to the edge of your means can lead to ruin if your hours are cut at work or if some catastrophe befalls you. Part of living within your means is planning for the future, and setting aside money for emergencies and the long term, before you spend on discretionary items. Living within your means also requires pay less than you think you can afford so that you don’t suddenly find yourself saddled with high payments at the worst time financially.
Finally, if you are having trouble living within your means, but are not in a position to cut some of your expenses, you can earn more money so that your income exceeds your expenses. This might mean getting another job (usually part time), or coming up with some way to earn alternative income.
Once you understand how money works, and how it can work for you, it becomes important to make sure that you are living so that you have more coming in than you have going out.