It seems like the golden rule of personal finance is to “live within your means.” Those four little words seem simple enough, so why don’t more people do this?

Well, do you know what your “means” actually are?

If the first thought that pops into your head is your yearly salary, you’re on the right track, but that doesn’t tell the whole story. You’ve got to think about the money that actually hits your bank account (after taxes), and what money is tied up in rent, mortgage, car payments, debt, and Living expenses. To “live within your means,” you need to have more dollars coming in than are going out.

That seems like simple enough math, but the reality is you might float along from day to day, not really knowing how much you have to spend, or where it all goes. You might wonder why you don’t have more, but you stop short of doing anything about it. It just seems too overwhelming to know where to start.

The good news is I want to show you how to start living within your means, and I’ll explain exactly what you need to do in three steps.

But before we get started, I want to lay out a few things:

1. You can expect a “raise” in pay if you follow these steps. I’m confident you will get it.
2. This will take hard work. I’m not going to sugarcoat that part.

Ok, here’s how to start living within your means:

1. How Much Money Do You Bring in Each Month?

In order to live within your means, you have to establish your means. How much money do you bring in each month? If you don’t know how much you make per month, then you are one strange beast my friend. I don’t foresee this being a problem for people. If your income fluctuates then you might want to check out the article about Living Paycheck to Paycheck, but I’m guessing most of us know just how much we made last year (and don’t we wish it were just a bit more).

Get down to a dollar figure by adding up a month’s worth of paychecks andy any other income sources (and only the amounts that actually hit your bank accounts after taxes and other withholdings).

2. Record Your Spending

Establishing your means was the easy part. This is the hard part. I don’t propose that you just kind of estimate, or guess what your expenses were for the last little while, and then decide whether you’re living within your means.

I suggest you look backwards at your check register, bank statements, or credit card statements to get a general idea of where you were at with your Spending. You might have a rough number in mind, but all that’s really important is the future ahead of you. You need a way to track your spending. That’s the only way to live within your means for the long term.

You see, money management is 90% psychological, and when you record your spending, then you will naturally spend much less (i.e. begin living within your means). Now, I don’t mean “look at the credit card statement once a month” and counting that as tracking spending. No, I’m talking about something more intentional, more involved. Write it down. Set up a spreadsheet. Or use a handy app like YNAB (I’m biased, of course).

How I Got a Raise (and How You Can Too)

When I was in high school I tried this. I simply wrote down on a lined piece of paper everything I spent for a month. I was shocked at how high the number was. The next month I spent half that amount! And the next month it dropped by another 25%. Oddly enough, I didn’t feel like I was missing out on anything. Naturally, I had much more discretionary income in high school, so such a drop was realistic. However, to see a 20% decrease in your spending once you begin recording all of your purchases is not uncommon. Congratulations on your new raise.

3. How to Live Within Your Means

After not recording what you spend for a few decades, it can be a bit difficult to just start right off the bat. I know of no other way though. It’s much like the attempts my wife and I make at limiting our dessert intake. We say we’ll just have one per week, or maybe one per day, or whatever – but that never seems to work. The only time I’ve ever successfully managed to avoid desserts was when I avoided them completely.

It’s the same with recording your expenses. Record all of them. Don’t let one slip through the cracks. Certainly a few dimes for a soda are not going to matter to your pocketbook. It will affect your habit formation though – and that’s where it counts.

Record your expenses for a month to see if you truly are living within your means. Compare your inflows of cash (from Step 1) to your outflows of cash. Now you know where you stand. With that information in hand, you can start working toward a lifetime of living within your means by shifting that balance so what you spend is below what you make.

It might take some time, it will definitely take some work, but you can live within your means. You’ll be hanging out with the minority – but it sure feels nice.

Want some help tracking expenses and figuring out if you’re actually living within your means every month? Sign up for a free 34-day trial of You Need a Budget for help with tracking, plus you can see a report of your income vs. expenses to know exactly where you stand.

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