Live within your means

If you are like many Americans, you may find that you are spending more than you’re saving and steadily going deeper into debt as a result. This is an easy and common pattern to fall into, and one that requires some planning and discipline to reverse.

The first step is creating a budget. As unpleasant as this may sound, creating a budget is nothing more than examining your income and expenditures in order to determine exactly how much money you have coming in and where you’re spending that money.

Once you’ve got a clear understanding of your current budget, your challenge is to find places where you can spend less (or earn more) in order to achieve your financial goals. Here are some steps you can take toward that end:

1. Question your needs and wants

What do you want? What do you really need? Evaluate your current financial situation. Take a look at the big picture. Make two lists – one for needs and one for wants. As you make the list, ask yourself:

Why do I want it?

How would things be different if I had it?

What other things would change if I had it? (for better or worse)

Which things are truly important to me?

Does this match my values?

2. Set Guidelines

We all have different budgets based on our needs and wants. But building a budget chart on the next page shows some guidelines on how much should go toward different expenses. You may need to make adjustments for a daily latte fix or visits to family, but remember to subtract amounts from other areas if you do.

3. Track, trim and target

Once you start tracking, you may be surprised to find you spend hundreds of dollars a month on eating out or other flexible expenses. Some of these are easily trimmed. Cutting back is usually a better place to start than completely cutting out. Be realistic. It will help you to be better prepared for unexpected costs.

The smart way to trim expenses

In finding ways to trim flexible expenses, it helps to have a goal to save toward each month. Setting such a goal needs to be SMART:

Specific: Smart goals are specific enough to suggest action. Example: Save enough to visit Rome for your wedding anniversary. Not just “save money.”

Measurable: You need to know when you achieved your goal or how close you are. Example: A trip to Italy costs $2,000, and you have $800 saved.

Attainable: The steps toward reaching your goal need to be reasonable and possible. Example: I know I can save enough money each week to purchase that trip to Italy.

Relevant: The goal needs to make sense. You don’t want to work toward a goal that doesn’t fit your need. Example: We would like to stay in four-star hotels in celebration of our anniversary.

Time-related: Set a definite target date. Example: I want to go to Italy by next summer.

This chart shows some rough guidelines on how much of your income should go toward different expenses. If you live in an area where transportation is higher than normal or rents/mortgage are higher, you may need to make adjustments. Also, if you would like to add a section for gifts, or something else, then you’ll need to subtract from another area.