Living within your means is a basic tenet of being financially successful. Such a lifestyle is offered as a requirement without further explanation, and what it means is often ill-defined. While it is not a complex concept, it is important to understand what it is — that is, if you are going to attempt it.
Living within your means can be viewed as personal financial sustainability. It is a state of equilibrium that can be maintained on an ongoing basis. It truly is a basis from which financial success can be attained.
How to Live Within Your Means: An Overview
To live within your means, you must maintain an equilibrium between income and expenses, meeting all your obligations without using debt for living expenses. It also encompasses maintaining adequate reserves and funding your long-term goals. This can be relatively easy to achieve on a short-term basis. In the long term, it is necessary to meet a variety of other conditions. These are as much characteristics as they are conditions.
Prudent reserves, in the form of an emergency fund or a cash reserve, allow your budget to absorb temporary setbacks without dramatic consequences. A major car repair or home repair should not derail your budget. Plus, a cash reserve fund is not merely a protection against negative occurrences. It can allow you to take advantage of opportunities.
Having a sufficient reserve fund can allow you to make occasional purchases before you need them and achieve considerable savings. For example, the fund lets you purchase things that you will need in the future when they are on end-of-season clearance. It doesn’t make sense to put discounted items on a high-interest credit card, but it can make sense to buy things ahead of time at considerable savings.
Unfortunately, insurance is a difficult subject for many people. Perhaps they should back up and consider the more global concept of risk management, of which insurance is one potential solution. You face a variety of risks in your financial life. One is your ability to earn an income. Others include the potential medical expenses, loss of assets, and premature death.
People often have no difficulty recognizing medical insurance’s value in transferring the majority of that risk to another party. Likewise, people tend to view homeowners and auto insurance as necessities: They see the cost of the premium as small compared to the risk of loss.
People tend to have more difficulty with life and disability protection. But a disability or a premature death can be financially devastating. While insurance is not always the only solution, a lack of education about a problem and its potential solutions will never make the problem go away.
Working Toward Goals
Working toward long-term financial goals is a basic part of living within your means. If you are meeting your expenses without addressing your long-term goals, then you are just getting by. Living within your means is ultimately sustainable, which means that long-term goals must be addressed. Otherwise, you eventually reach a situation that is no longer sustainable. Sometimes you have to experience getting by before you can achieve a state of living within your means. That’s fine. But eventually attaining long-term goals is necessary.
It isn’t necessary to be completely on track for your goals in order to live within your means. But you need to make reasonable efforts to meet them.
Working toward goals leads to being on track for them. It isn’t always possible for people starting out to be fully on track for all their long-term goals.
Debt is not necessarily bad. It's a tool. As a tool, it allows people to achieve things that they could not without having it available. This is often the case with homeownership. Debt, in the form of a mortgage, lets people purchase an asset that they could not otherwise afford. Using debt allows them to reach a level of financial success they could not otherwise achieve.
Debt, like many powerful tools, is dangerous when misused. There is nothing inherently wrong with using leverage to achieve a positive result. The danger is in using leverage to purchase things you want but that do not advance your financial situation or save you money. You can have a mortgage, a car loan, and student loans, and still live within your means. But if you put your clothing purchases or vacations on credit cards, you're headed for trouble.
Moderation Is the Key
Moderation is relative; what is moderate for someone with little income is different than what is moderate for someone with a more substantial income. To achieve a state of living within your means, it is necessary to be moderate in your expenses; your housing, car, and other expenses should be reasonable in terms of your income.
Being moderate is much different than being frugal. Moderate people purchase what they can afford and live comfortably with that. Frugal people deny themselves in sacrifice to a future state.
Moderation does not mean going without what you can afford — it means going without what you can’t afford. That is the essence of living within your means: You do without what you cannot afford and structure your financial life to achieve your goals within the constraints of your resources. You don’t allow yourself the dubious luxury of putting your goals before your income.
If you don’t find the comfort of living within your means to be sufficient, you change your means first. You don’t have to get there on Day One. But by working in that direction, steadily and positively, you'll achieve a state of living within your means and ultimately maximize your financial well-being.