Below Your Means
The best money advice I was ever given was to live below my means. This advice was given to me by My Mother, and also by David Chilton The Wealthy Barber.
Living below your means has many benefits. It can help you pay down debt. It helps you save for your future. It develops discipline. It can also help you be purposeful with your monetary choices. And if you hit a period of reduced income, you won’t have to make lifestyle adjustments immediately or dip into your savings too soon – because you have a built-in buffer.
The best thing to do is establish a portion of your money that you choose to live without. The Wealthy Barber recommends to “pay yourself first” 10% of your income. This is a nice amount to try, you might be able to achieve more or perhaps that amount is too ambitious. Put this money away every single payday. If possible, have your bank auto-transfer it a savings or investment account that’s not connected to your debit card.
The second thing you should do is set a reasonable amount of pocket money for yourself to use weekly. This should be 5% of your income or less. Use this money as pocket money. It’s for times when you want to buy a non-essential treat like a coffee or snack, and use it for your entertainment budget. This might mean that you need to pack lunches from home, or bring a thermos with some coffee in it. But it’s a way to constrain your discretionary spending. And if you have money left at the end of the week, put it in a jar to put towards something you’re saving up for.
The 85% that remains is your living budget. It covers everything else. Food, lodging and utilites, transportation, clothing, insurance, entertainment and gifts. Your lifestyle should fit comfortably into this budget. If it doesn’t, then it’s time to consider what changes you will make. If you are not living within the 85% I believe you are living above your means. Perhaps you need to downsize your home, or adjust your expectations about the type of car to drive, or the amount your spend on wardrobe or entertainment. Some changes are easier to make than others. The areas you choose to adjust will reflect your priorities.
The next thing you have to do is stop living on credit, or at least budget to pay your credit card bill monthly and not use it for impulse purchases.
This is just like the piggy banks I recommend using with children. Only it’s the grown up version of spending.
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