One of the golden rules of managing your money is to not live beyond your means.
It means living the life you can afford and spending at most what you earn. However, if you want to strengthen your financial position, you should aim to spend less than what you earn so you can use some of your money to grow wealth and achieve some financial goals.
Less stress
Reckless spending eventually catches up with you and causes stress. If you live within your means, you will have money for the things you need most of the time. You won’t need to stress about how to pay your rent or home loan, groceries, transport or any other basics.
When you know what you can spend your financial life will be organised. You will be able to manage your debts so creditors stop hounding you and you won’t need to hustle to borrow money for things you need.
You can avoid debt
Most people who live beyond their income do so by running up debt. Debt has to be repaid and loans and credit from banks, financial institutions or credit providers cost you more money in interest. Unsecured debt like that on a credit card, an overdraft or personal loan is particularly expensive. The more debt you run up, the higher the interest payments will be and the more unmanageable your repayments become.
If you already have debt, living well below your means for a time will help you pay it down faster so you can free up the money you spend on repayments and interest and ultimately live better.
You don’t deplete your savings
If you are living beyond your means without taking on debt, you are probably raiding your savings. Unless you are very wealthy, you run the risk of depleting your savings. If you are incurring debt, you will probably eventually raid any savings you have to repay it.
You can have money for emergencies
If you spend everything and more than you earn, you won’t have any money when financial emergencies arise.
When you live beyond your means your options for dealing with any financial emergencies become increasingly limited. As you run up more debt, the amount you can borrow will reduce because credit providers must consider how much debt you are already repaying and how much you can afford to repay.
Living on less than what you earn allows you to set some money aside for financial crises.
You can save for your goals
Living on less than you earn will enable you to save some money for your goals – both short-term ones, such as a wedding or a holiday, and long-term ones, such as for further education for your children or for your retirement.
Living within your means sounds like simple advice, but many people find it hard to follow.
Here are some practical steps to ensure your lifestyle matches your earnings:
Understand what you earn
This means not just remembering the gross salary you earn, but what you get to take home each month.
If you are self-employed and/or earn irregular amounts, consider how much you earn over a year and how that translates as a monthly income. Have the big payments made into a separate account and automate a transfer of the monthly amount only into your regular bank account. Underestimate your monthly amounts to create a buffer in case you experience lean times.
Know the difference between needs and wants
Have a clear idea of the things you need and the things you want. Spend on the things you want only when you can see all your needs are catered for and you have money to spare or you have saved for them.
Create a budget and spend within it
Draw up a budget at the start of each year and allocate your earnings first to your savings and your needs and then your wants. Use your banking app to track your expenses to your budget plan. If you overspend one month, cut back the next.
Downscale if you need to
If your expenses exceed your earnings, you may need to downscale – your accommodation, transport, clothing, groceries.
Say no
If family or friends are pushing up your expenses, explain to them the need for you to live within your means and to stick to your budget. If you are supporting family members, set clear boundaries on what support you can afford to provide.
Be careful how you use your credit card
Credit cards enable spending beyond your means. It is easy to use a card to pay for things you possibly cannot afford. The best way to use your card is to only spend what you can afford to repay each month so that you do not incur costly interest. Banking apps can also help you track your credit card spending. If you can’t stick to what you can afford, don’t use a card.
Save for big expenses
Saving for big ticket items rather than buying them on credit not only saves you expensive interest and insurance costs, but while you are saving your money, earns interest for you. Saving for big items takes time, but allows you to spend more on the things you want.
Have an emergency fund
Setting aside savings in an emergency fund will allow you to keep within your budget and avoid credit. Ideally, you should save three to six months of living expenses for emergencies, but starting with any small amount will save you money when an unexpected financial crisis arises.
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If you don’t have enough money for all your needs or you find it hard to say no to family, consider boosting your income by getting a higher-paying job or a side hustle. More than 50 percent of South Africans have found ways to earn additional income through hobbies that pay, or by doing after-hours jobs. |
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