A comfortable life and financial security is everyone’s ultimate desire. However, managing money can be challenging for many, and not everyone can afford a financial advisor. Personal finance doesn’t have to be complicated, though. Here’s the bare minimum you need to know about personal finance to help you avoid ruining your life.
Live below your means.
The simplest way to gain control of your finances is to live below your means. That’s all. Yes, that’s the bare minimum you must know about personal finance.
There are misconceptions about what living below your means really means. It doesn’t mean that you have to stop spending on the things you love. It means prioritizing future financial security when spending. It is possible to make wise spending decisions that accommodate an occasional dinner at your favorite restaurant.
Living below your means also means that you have some money left at the end of the month. You’re no longer living paycheck to paycheck and you do not run the risk of getting into more debt to pay your bills. If you can achieve spending less than you earn, you’ll be well on your way to financial freedom.
Simple, right? Not really. If it were that simple, there wouldn’t be so many people deep in debt. Living below your means requires great commitment and discipline. It will not be easy at the start, but don’t get discouraged when things don’t pan out as planned. Stay focused on your goal.
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How to determine if you’re living below your means.
Crunch the numbers. This is the part most people avoid. People avoid situations that make them feel uncomfortable. Crunching the numbers may reveal that you don’t make as much as you think or that you can’t afford your current lifestyle. This is a truth many do not want to face and would rather ignore the subject entirely. It’s impossible to know whether you’re living below your means without critically looking at the numbers. Here are simple steps to guide you.
Read More: How to Gain Control of Your Spending. 3 Simple Steps.
1. Understand how much you earn.
The first thing is to identify and list down all your income sources. Have a look at your salary slip, and make sure that you understand all deductions made on your salary/income. Remember, there’s a difference between gross income and net income. Gross income is the total salary you make, while net income is the money you take home after deductions such as tax, pension contribution, and social insurance contributions. The number we’re interested in here is the net income.
If you’re self-employed, calculate your average income over a couple of months, for instance, the last 6 months.
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2. Identify your fixed expenses.
Fixed expenses are the bills you pay regularly and whose amount hardly ever change. They recur either every week, month, quarter, or year. Examples of fixed expenses include rent, mortgage payments, car payments, insurance premiums, and real estate taxes. These expenses are predictable and are easy to budget for.
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3. Identify your variable expenses.
Variable expenses are the day-to-day spending decisions such as groceries, gasoline, clothes, or car maintenance and repairs. These costs change over time and vary depending on how much you decide to use a certain product or service each month.
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4. Track small purchases.
We often find ourselves making random purchases such as Starbucks coffee, movie tickets, dinner at a restaurant, or a pair of shoes. While they may appear small, such purchases can add up pretty fast to form a major part of our expenses.
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5. Do the Math.
Now that you know exactly how much money you take home and have estimated your total expenses almost to the last buck, the moment of truth has arrived. To find out whether you’re living below your means, subtract every expense category from your earnings. In this case:
Net income – (fixed expenses + variable expenses + small purchases)
If you have a positive number, it means you have money left after all your expenses. Congratulations! You are living below your means and are well on your way to financial freedom! You can use the money left to invest for a secure future.
On the other hand, if you have a negative number, your expenses exceed your income. That means that you’re spending more money than you earn and can easily fall into debt.
You might want to consider creating and maintaining a budget. Start by eliminating impulse purchases and only make small purchases if they are budgeted for. Keep fancy dinners to a minimum and avoid coffee shops. The next step involves reducing variable costs. Consider limiting your grocery budget or using public transport instead of maintaining a car.
Read More: 6 Budgeting Tips that Really Work!
If you’re already in debt, focus on saving money so you can pay off your debt. You can also consider talking to a financially savvy friend or colleague that can help you fix your current financial situation. You don’t need to spend money on a financial advisor. Friends and family can be of great help when it comes to getting tips and tricks on budgeting.
Read More: The Taboo that is Money Talk.
Living below your means is the bare minimum you need to know about personal finance to avoid sleepless nights and to fix your finances.
