You look forward to payday because it means fun is sure to follow. You’ll have the cash you need for a night out with friends, the latest tech gadget, or last-minute tickets to that concert next month. But, sometimes it just means being able to cover the check you wrote on Wednesday to pay for your child’s piano lesson, vehicle repairs, or the co-pay at the doctor’s office.
In either case, it can be hard to not see money as anything other than something that stays for a short time before exiting in an endless loop - leaving uncertainty as its placeholder.
Did you know there’s a way to escape this financial merry-go-round?
Once you exit this revolving door of living paycheck to paycheck, paydays bring more than a sigh of relief. They increase our confidence in our financial future. There is a way for each paycheck to bring you one step closer to an economic future where daily money stress is minimized, unexpected expenses are no longer a shock to your credit union account, and financial dreams can become a reality.
Let’s examine what it means to spend less than income and how it can change the projection of your financial future.
Income is secondary.
It doesn’t matter how much money you make. What matters is how much money you keep.
There are only two ways to spend less than income: 1) reduce expenses and/or 2) increase income. While you may focus on how much money you make and believe making more money will improve your financial situation, sometimes it’s much easier than that. Income is secondary to expenses in that you can make a significant impact on your income by merely reducing costs.
If you let income determine your lifestyle, then it will be tough to improve your financial standing. It’s easy to spend your entire paycheck each week regardless of how much money you earn. But, when you address your expenses first, you put your priorities in the right order. In the end, if your expenses continue to outpace your income, then you are headed for financial trouble. To spend less than income, you first have to identify all of your expenses.
Myth: I can only improve my financial situation if I make more money.
Reality: Reducing expenses is the fastest and most consistent way to improve your financial situation. If expenses continue to outpace income, then you may need to look for ways to increase your income.
Expenses are negotiable.
Expenses can increase or decrease based on your actions. Turn the lights off when you leave the room, use coupons, switch to a data-limited cell plan, or remove premium channels from your cable subscription package. These are just a few ways to take action to decrease your expenses. This is done without working any extra hours or taking on a side hustle to increase your income. These small savings can add up to big returns over time.
- Fixed expenses: Expenses that remain the same each month, e.g., rent, mortgage, car loan or student loan payments
- Variable expenses: Expenses that change weekly, monthly or annually, e.g., groceries, car gas, clothing or vehicle maintenance.
Even fixed expenses can be negotiated by refinancing to a lower payment, moving to a less expensive apartment or selling your vehicle.
To spend less than income, you have to be willing to identify what’s most important to you. Is it critical that you have an unlimited data plan on your cell phone? Are premium channels worth the cost if you only watch movies once a month at home? You might be paying for expenses you no longer use because they are set for automatic payment from your credit union account or credit card. Are you paying for a gym membership you haven’t used in three months?
When you renegotiate expenses, you can free up money to:
- Establish an emergency fund
- Save for a down payment on a home
- Take a family vacation without going into further debt
- Make regular contributions to a retirement account
Myth: I can’t live the lifestyle I want and decrease expenses at the same time.
Reality: By eliminating unnecessary expenses and redirecting your income towards specific financial goals, you put yourself in a better position to live a life you’ve always dreamed.
A spending plan is required.
You won’t know if you’re spending less than income unless you track it. A spending plan is used to compare income and expenses. When you keep total monthly expenditures below total monthly income, then you are spending less than income.
You have to create a spending plan that includes all possible sources of income as well as fixed and variable expenses. A crucial part of your spending plan is savings. Yes, you should list savings as an expense item on your spending plan. Your expenses will influence your savings amount. As you decrease your expenses, increase your savings.
Myth: Budgeting is too restrictive.
Reality: Spending less than income directly affects your ability to have financial freedom now and in the future. A spending plan can remove the stress of unexpected events and only takes a short time to plan and review each month. This planning will ensure you have money for the things most important to you and your family.
Budgeting is not about deprivation. It allows you to view your financial health through a clear lens, so you can see when you must delay gratification or make sacrifices to reach your goals. Similar to maintaining physical health, financial wellness must be part of your lifestyle. And when done right, your spending plan should include planning for fun!
When you spend less than income, you take control of your financial future. It means performing an honest assessment of your current financial situation and making the needed changes to protect the money you’ve worked so hard to earn. Unexpected events are sure to arise, but when you successfully manage cash flow and spend less than income, you can stay on track toward your financial dreams.