Thursday, April 2, 2009

Living Within Your Means

by Aussie 0 comments

Central to the subject of personal finance is the concept of living within your means. In a nutshell, to live within your means is to spend less money than you earn. It's a basic concept which I'm sure most of us know and understand but for whatever reason we occasionally (or sometimes frequently) like to ignore it.

So many of the basic problems we all face with our money can be traced back to a failure to live within our means. High debt levels and minimal or non-existent savings are manifestations of the problem. And while you might be confident that you can make the repayments or borrow more money to cover any short-term cash flow problems, what if the unexpected happened.

In the current economic climate, the reality is that more people are losing their jobs. If you've managed to save some money and at least establish and emergency fund, you'll have a cash buffer if the worst happens. But if you've spent everything you ever earned (and then some) and suddenly you find yourself unemployed, would you be able to make ends meet?

Escalating credit card debt is a sure sign that you are living beyond your means. If the balance outstanding on your credit card is growing from month to month, it's probably time to take a step back and have a close look at your finances. How much money do you earn and how much do you spend? Be realistic about it. Remember if you're not saving any money and your debt levels are rising, there must be a shortfall somewhere.

Prepare a budget. Note down for a couple of months how much money you've spent and on what. You will probably be surprised. I know I am each time I go through that exercise.

Building wealth the old fashioned way requires you to establish a habit of saving. You'll be amazed at how quickly $50 or $100 put aside each week into a savings account will add up. Or alternatively, an extra $50 or $100 paid off the credit card will soon have it paid off and will free up the cash that was going in interest payments for use on other things.

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