"What does it mean today to ‘live within your means’?” was a question posed by Megan of The Happiest Mom during a Women & Co. #MomTalksMoney video chat in July (2012). For our parents and grandparents, it meant only spending what you earned—hopefully leaving some financial “wiggle room” for unexpected events like a leaky roof.
But as we added credit cards to our wallet, our notion of “living within your means” somehow morphed into “living within your available credit limit”—at least for some. To regain their financial footing after the Great Recession, many families have returned to the “retro” definition.
Considering the precarious state of our economy, is living within our means good enough? Should we be aiming to live beneath our means, rather than within them? That’s the question I, in turn, posed to seven money gurus in my network. “Yes,” each enthusiastically exclaimed, and then shared with me these secrets to living a financially prudent life:
1. “Think of your ‘means’ as a pie,” suggests Carmen Wong Ulrich, President and Co-Founder of ALTA Wealth Management. “Each part of your life—mortgage, debt, education, savings, vacations, and so on—requires a ‘slice.’ If one piece of your ‘pie’ is too big, it has to come from other pieces, the other parts of your monthly budget: your take-home pay. That pie is 100%. That’s all each of us has to work with: that is your ‘means,’” explains Carmen. She cautions, “The biggest expense that we have control over is our home. Where and how you choose to live is one of the biggest decisions you can make for your budget.”
2. “Keep fixed expenses at 50% or less of pretax income,” says Jonathan Clements, Director of Financial Education for Citi Personal Wealth Management. By fixed expenses, Jonathan means mortgage or rent payments, car payments, utilities, insurance premiums, groceries, etc. “This leaves the other 50% for taxes, savings, and discretionary expenses like vacations and eating out,” says Jonathan. The result? “It gives you some room for error in your finances, such as getting hit with an unexpected expense or a sudden drop in income. If you lost your job, you could probably get by on just half of your old income, and maybe less,” says Jonathan.
3. “Strive to save 20% of your after-tax income,” recommends Manisha Thakor, Founder/CEO of MoneyZen Wealth Management. “Most people don’t want to hear this,” acknowledges Manisha, “but in a world where we are increasingly responsible for our own retirements and healthcare, anything less is a precarious place to be. Admittedly, saving 20% means your life probably will not look like that of an A-list celebrity. And, it probably will mean that, like your parents and grandparents, it may take some years to obtain a certain standard of living, so you will have to adjust your expectations. But, you will have a healthy financial safety cushion and more financial flexibility should life toss you a curve ball.”
4. “Don’t buy it if you can’t pay for it in cash, with the exception of your house and education,” say Fab & Fru co-founders Stephanie Berenbaum and Brandi Savitt. “Our grandparents had the right idea: before there was fake food and fake money, they ate only real, identifiable food and paid for things with cash. Follow this rule and you’ll be living within your means, not to mention eating healthy.”
5. “Keep your overhead low so you can stockpile cash for living,” believes Amanda Steinberg, Founder of DailyWorth. “At the end of the day, maintaining a life that you can barely afford isn’t much fun. We also know from dieting that deprivation doesn’t work. Everyone needs a treat from time to time—I know that I do! So I keep my fixed expenses as low as I can and I save, save, and keep saving. I even keep separate banks accounts, each earmarked for a specific goal, from emergencies to my future home to a week at the beach in the summer.”
6. “Be intentional in how you use money,” encourages Caryn Effron, Founder of GoGirlFinance.com. “Living within your means has a great deal to do with becoming thoughtful about what is truly important in life. Family, friends, my work—that is what brings joy to my life. Stuff is just stuff—don’t get caught up in consumerism. Hold onto who you are and what is important and use your money to create experiences aligned with your values.”
7. “Drop the financial baggage when talking to your kids about money,” advises Amy Moses, CEO and Founder of Ballooning Nest Eggs. “When we say ‘no’ to our children, it’s often without explanation. We trot out clichés—‘Money doesn’t grow on trees’ or ‘It’s never enough!’—or our own childhood financial baggage, ‘When I was a kid I didn’t have half the things you have.’ Soon, words like ‘budget’ register as negatives in our children’s minds. All they hear is ‘no fun.’ But, if chats about money weren’t shrouded in anxiety, then we could help them, help us live within our means. This doesn’t mean you have to share your pay stub or whip up a PowerPoint presentation on balancing a checkbook. It means including the kids in on some of the choices. Name some fun summer activities and attach a cost to each. Set the limit that you can spend and allow them to pick the activities they want most. And, of course, sprinkle in some no-cost, high-fun stuff like bike riding, butterfly catching, and hiking.”
Source: Women & Co., a service of Citi