You’ve probably heard of living within your means, and maybe you do. Perhaps you even sock away a bit in savings, and have started to pay more aggressively on your mortgage and cars, in order to build your assets and reduce expenses even further. All are smart move. But, the economic downturn and housing market bust brought a whole new axiom to what it will really take to build wealth and financial security for future generation, and success is no longer deemed by whether you can stick to a budget; it’s about coming in under it. By how much, you ask? Like with most financial advice, different experts will tell you different formulas for success, but at the minimum, you should strive to come in below your budget by at least ten percent each month–in addition to making sure you’re on track for retirement and a solid emergency fund. Here are four ways to check in with yourself, to makes sure you are striving to live below your means.
Unless you’ve budgeted for it–don’t buy it. We all know that impulse buying is a key issue in managing finances. Impulse buying leads to purchases you haven’t thought through, which often indicates that you’re operating more on “want” than “need.” There’s also a good chance you’re paying more for an item that you could find cheaper elsewhere, had you taken the time to research. But most importantly, truly carving money aside for something is a good determination of how bad you really want it. Studies show time and again that people who pay with credit agonize far less over purchases and prices than those who part with actual cash, and impulse buying is no different from a psychological standpoint. If you want something, put it in your budget before you ever buy. If the pain of seeing your numbers dip doesn’t deter you and you have the money, move forward. But, you’ll find that at least 25% of the time, certain expenditures lose their appeal when we consider what we’re losing in the transaction.
Pretend your emergency savings doesn’t exist. You need to have at least six to eight months of your take home pay established in savings before you ever consider yourself “in the clear” financially. If you don’t have it, the primary function of your money should be spent on building savings, and retirement.
Stop telling yourself you “deserve” it. Avoid the trappings of telling yourself that you make enough money or work so hard, that you deserve to spoil yourself. While I’m all for taking time to smell the roses, rewarding yourself but it doesn’t have to be financially or materially driven. Reward youreself by investing in your health, stress-reduction, forming positive memories, tackling goals, and personal fulfillment. Skip the reward of a pricey purse, or car, whose appeal will be short-lived, anyhow. (Science says so)!
Figure out exactly where you stand with retirement. You contribute a bit of your paycheck to your retirement, so you figure that you’re doing the financially responsible thing, right? Saving for retirement early on is certainly a wise financial move, but there is a number associated to how fruitful your efforts will prove–and you should know what it is as readily as you know your monthly take home pay. Financial experts generally concur that a person should realistically plan to spend 80% of their current income in retirement, in order to maintain a similar lifestyle. So, if you make $80,000 now, plan to spend $64,000 a year as a retiree-and more, if you envision travel and leisure in retirement. That money will need to come from what you’ve saved, and whatever you can generate from that savings, in the form of dividends and investments, social security (if it’s still around), and any work you can and want to continue doing. There are online calculators that can help you to determine where you are and what you need saved, but there’s also an easy formula. Take what you currently make, and multiply it by 12. If you make $90,000 now, you’ll need to have at least $1,080,000 saved in retirement before you can ever consider yourself in the clear.