Financial Planning to Live Within Your Means

Income must always exceed expenses—a maxim most people will agree to. When it doesn’t, then expenses must shrink to fit income—a corollary that trips up some people. These are practical ways you can organize your finances to support your plan.

Don’t spend what you don’t have. Expect the unexpected. Automate your finances whenever possible. Pay off balances every month in full. Know your weaknesses and don’t tempt yourself!

1. Don’t spend what you don’t have

Only spend what you have--liquid assets--not what your credit rating will allow you to borrow. Banks do not raise your credit limit and your credit rating because they think you will be able to pay the debt. They extend credit to you because you keep using the credit you’ve been given—and don’t default on payments. They don’t care whether you’re getting deeper and deeper in debt. You’re paying the interest now, and if you don’t eventually pay off the principal, then your heirs will. Besides, if they don’t loan you the money, another bank will, and they’d rather be the one with your business.

In checking and savings accounts, keep at least enough to cover about two to three months expenses. You should expect unexpected expenses to occur.

The car will need tires or a rebuilt transmission; a storm might tear shingles off the roof; the hot water heater will break; and your daughter might break her arm. Plan your budget so that you can handle something like that every month or two.

The two to three month savings cushion isn’t just for one of those surprises—it’s for the month they all hit at the same time! You might need more than two to three months if your income varies considerably from month to month or if you’ve got a bill that might take more than half of that, like a full semester of tuition, room and board for Jr. at the university.

Whenever available, use auto-bill pay, electronic fund transfer (EFT), auto deposit, whatever. Stopping one of these is harder than the non-automatic equivalent, which will encourage you to e.g. pay off the whole credit card balance rather than just half so you can buy that new sofa that’s on sale. Most of these automated cashflow services should be free, but some will incur a convenience fee that can be excessive, so be careful.

Use credit cards only to assist cash flow during the month, not as a way to carry balances from month to month. Pay off the entire amount within the grace period. Most credit card companies make it very easy to schedule a payment in advance that will make an EFT exactly on the due date in the exact amount of your last monthly statement. Get in the habit of scheduling that as soon as you see the bill; there’s no reason to wait until the due date if you know the bank’s software will do that for you.

If you don’t have the will power to handle credit cards in a way that keeps you living within your means, then use a debit card that debits everything directly from the balance in your checking account. That retains the convenience and security of plastic over wads of currency. If there is something about that money in the checking account that just seems harder to raid than the credit extended by the bank, then you are one who should strongly consider this precaution.