Live within your means

     If you want to be free from the chains of debt you must learn to live within your means. We have got to learn that spending money that doesn’t really exist is a guarantee of future money problems. If you are dissatisfied with what your “means” are and want to spend more money then you actually have in cash than you need to do something to increase your means!

There are three ways to do that. You can generate more income, you can reduce expenses, or you can do both.  

     Generating more income can happen many ways. You could make more money at work. You can sell something for money that can be used to buy something else. You can get a part time second job. You can turn your interest or hobby into a small business that earns money and / or provides deductions that reduce your tax liability. Reducing expenses isn’t as hard as it sounds. The key is to do it gradually. Setting goals will help. Make it a goal to reduce your entertainment expenses by 5% for three months instead of 15% all at once. Month 1 – give up one dinner out, month 2 – give up one dinner out and 3 movie rentals, month 3 – give up one dinner out, 3 movie rentals, give up your HBO, and have a family fun night at the house!   

If you are going to live within your means you must have a budget!

     So many people who try to live on more than just their income get in trouble because they have no idea what they are spending on expenses. They do not have a budget. Writing a realistic budget, that is based on accurate information, is the first step in determining exactly where all the money is going. Most people only know they are out of money but still have bills to pay because they have no written way of accounting for their money. The real problems then start because most people will resort to credit in order to pay their living expenses until the next paycheck.  

     Getting started with a simple budget is easy. List your total household income. On a piece of paper make 5 columns. In the first column list all the things you spend money on during the month. Beside each expense write the amount you spend on each item in the second column. In the next column write the date this expense must be paid. There should be a column for each time you are paid. In those columns you will put how much you must set aside each pay so that you will have enough set aside to pay that expense by the due date.

     Once you have your budget in place you will know how much money you have to spend and where and when you can use it. Now it is time to get to work on reducing the expenses you have listed in your budget. You will find that just like losing the first 5 pounds on a new diet is easy so is making the first few expense reductions. When you know what you are working with you will come up with many common sense ideas on your own to reduce the expenses. You may even surprise yourself when you discover that you were spending that much to begin with, but had no idea! Make a goal for yourself to reduce your overall expenses by 5% in the next month and then implement your ideas to cut costs. Use the money you save to pay off debt.  

     Some of the easier things you can do to get started are things like reducing the number of light bulbs in your home. Don’t leave anything plugged in when not in use like cell phone chargers. Utilize sales, coupons, and become a bargain hunter. Stop spending or spend less on extras like warranties, convenience services, and dessert after your dinner out!  

Start your own business

     One of the easiest and most impactful ways to bring more money into your home, if you are working for someone else, is starting your own small business part time. You can make money doing the things that you love the most but the best reason for the part timer is the tax deductions you can take. If you get them, the raises your boss is going to give you can’t compare to the financial impact your household budget will see if you do not have to pay federal income tax on the money you earn. Many people will pay 18% (or more) of their income in federal income tax. What is 18% of your income? How would you like a bonus check for that amount every year sent to your home from Uncle Sam? 

     In the course of managing your small business you will find many opportunities to turn what used to be strictly personal expenses into deductible business expenses. You used to use the Internet to play, now you use it the majority of the time to run your business. That makes it deductible. You used to use your cell phone to check email from your friends. Now you use it the majority of the time to text offers to your customers. That makes it deductible. You were going to buy a laptop so you could look up football scores while working in the kitchen. However, now you will be using it the majority of the time to create and update your business website. That makes the cost of the laptop deductible. These deductions mean you will receive back more of the tax you paid. This "bonus" you get in the form of a tax refund will certainly help you live within your means.

     To live within your means is your responsibility and you will have circumstances that only you are aware of. That means it is your job to take a harder look at your situation and your budget and get creative about generating income and reducing expenses. You will need to find alternatives to the things you are paying for now. You may need to learn to shop differently and to look at purchases differently. For example, when I am shopping I am constantly asking myself questions to justify a purchase.

1.    Is there a less expense alternative?       2. If there is how does the quality compare?

3.    Is there a chance this will go on sale later?   4. Can I wait 2 weeks to buy this?

5.    Should I be borrowing or renting instead?

6.    Will the seller give me a better price or value if I ask?

7.    Can I find a better deal on this item from an online seller?

8.    What am I giving up / what won’t I be able to buy if I purchase this item now?

9.    Most importantly, is purchase an asset or a liability?

Buy assets

     An asset is something that you own that will generate income or save you money. An asset may cost you money but it saves more than it costs. It may not always be a “fun” purchase. A liability is something that you own that is costing you money. Generally, you can identify liabilities if on the surface that item appears to be lots of fun. Assets, like a pressure washer bought by a homeowner with mold growing on the house, do not always appear to be fun! A liability does not generate income and it certainly is not saving you money. For the sake of this article you also need to focus on tangible value versus intangible value of an item. A purchase may make you feel very good but if it is not solving a problem that will cost money now or in the future it is a liability. Try to buy things that will be assets. Those assets will pay for themselves, help you live within your means, and put more money in your pocket that will allow you to buy those fun liabilities you want! 

      When you are analyzing the expenses in your budget ask yourself “What can I do on my own?”. There may be things in your budget that you are paying someone else to do for you when you could be doing them on your own. Do you have a dry cleaner ironing your shirts or a cobbler shining your shoes?  

     One important note is to again make an analysis of each particular situation. In the time it takes you to iron all your shirts would you generate more in income than you would save in paying the dry cleaner to do it? You are not really saving anything if you lose income because you are spending your time trying to save money  

Summary 

     Living within your means is the key to keeping yourself on track financially. You can not spend money that doesn’t exist in your bank account. However, that doesn’t mean you are stuck where you right now for the rest of your life. You can have more. You can find ways to generate more income for yourself. Get creative in finding alternatives to things you are spending money on right now. Learn to make many of your personal expenses tax deductible by arranging your lifestyle around a part time small business. Learn to do some of the things you are paying others to do and pocket that cash.

About BowmansMoneyCollege.com

     Bowman’s Money College offers consulting and educational advice to individuals and families on personal financial matters such as starting a small business, writing and following a household budget, and rebuilding credit. For further information visit BowmansMoneyCollege.com or email mike@bowmansmoneycollege.com.