If you want to meet your financial goals, retire or just not be in perpetual debt, it’s important to live within your means – or better yet, below your means. Living within your means is when you spend no more than what you earn in a month. And when you’re living below your means and spending less than you earn in a month, you’re able to save for the future – for things like retirement, a dream vacation, a down payment for a house or car, or an emergency fund.

Living within your means is more than just adding up numbers – it means taking responsibility for your finances and choosing where your money goes, instead of being influenced by wishes, advertising, old habits, or negative peer pressure. If you live within your means, you buy things if you can pay for them now or by the end of the month – with the exception of larger purchases like cars and homes. Choosing to live within your means is an excellent way of building your financial well-being.

The first things to do are determine exactly what you have to spend each month, and then know how much your expenses are. Check out the suggestions below, as well as our article on creating a budget (and the one on revising a budget).

Know how much you have to spend

First, you have to know how much you have available to spend. If you’re working, knowing your annual salary or hourly rate isn’t sufficient. You need to know how much you’re actually taking home (hopefully via direct deposit!) after taxes, insurance and other withholdings are removed. In other words, you need to know your take-home pay, or your net income. If you don’t earn wages but instead receive retirement disbursements or disability payments, you should look at your monthly income from those sources. And if you receive alimony or other benefits, include that as well.

For most people, it’s easiest to determine income and spending on a monthly basis.

  • Paid Monthly - So if you get paid twice per month, add up your take-home pay from both paychecks.
  • Paid Sporadically or Weekly - If you get paid only in certain months or on a weekly basis, figure out how much that translates to each month – and make sure you’re accounting for all 12 months of the year.

Spend less than what you have

Once you know how much you receive in income each month, figure out what your expenses are. Be honest about what you actually spend, and be truthful with yourself about what’s a want and what’s a need. `Then, if you don’t have one already, create a budget that will help you plan your monthly expenses and keep them less than your monthly income.

Don’t rely on credit cards

If you’re relying on credit cards to pay your monthly bills or day-to-day expenses, then you’re not living within your means (unless you’re paying those cards in full each month every month). When you plan your monthly spending, completely rule out credit cards as a way to make ends meet. Keep in mind these facts about credit cards:

  • Credit cards come with interest – so today’s $16 lunch out may end up costing you $20 once you’re done paying the balance off with interest.
  • Credit cards are unreliable as a source of income since your financial institution could decrease your credit limit or even close your credit card in the event you don’t keep up with payments.
  • Credit cards have limits, so if you keep charging more than you're paying, you'll eventually run out of available credit.

Get in the practice of saving up

It’s tempting to use credit cards for large purchases you can’t afford to pay for outright, like a new television. But doing this is usually bad for your financial well-being. First, that kind of purchase usually entails interest, so you end up paying more than the item is worth. Second, the practice encourages you to get into the bad habit of spending money you don’t have. Instead, save up for purchases, putting aside some money each month until you’ve saved up enough to buy the item outright. If you can’t afford to save up for the purchase, then you can’t afford to buy it.