Living within your means: Learn to maximize your income

When it comes to spending, where do you stand: Do you spend less than you earn? If so, you’re living within your means. As you can imagine, sticking to this important principle is crucial for your family's budget and financial future. It’s also key if you have kids, as you can teach them the importance of applying this principle when they grow up. In this blog, we'll cover what living within your means is and the easiest ways to do it.

What it means to live within your means 

Your take-home pay is the money you have to live on, and for most families, it's usually around the same amount every month. Your expenses can vary, though. To live within your means, you control your spending to ensure you spend less than you take home. 

Imagine this: You're earning more than you ever thought you would. You're taking home a whopping $120,000 per year. Sounds great, doesn't it? That amount of money should easily support a 4-person household, right? Well, it might, but let's break it down. 

That $120,000 per year is your gross income — not the amount you actually get to keep. After taxes, you're now down to around $91,944 per year, which is roughly $6,500 per month. That sum sounds like a lot of money until you start adding up your expenses.

Your first set of expenses are fixed expenses. These are the ones you pay every month, and they include:

• Mortgage or rent

• Utilities

• Car payments or transportation

• Insurance

• Loan payments

Imagine if you spend $4,500 on these each month. That leaves $2,000 to spend on other things–not including childcare, which is really costly for the first five years. But before you think about spending this money, look at the other expenses you haven't listed yet: groceries, gas, dining out, entertainment, and clothing. After that, you might not have much left, and you haven't even figured in your savings yet!

Stretching your paychecks to cover all your expenses and purchases requires some thought. After all, you could easily go into debt if you spend too much money. Overspending not only causes debt, though. It can also leave you with stress that might keep you up at night. The good news is you can avoid this stress by carefully planning your spending. 

How to live within your means

With a few practical tips, you'll find that living within your means isn't all that difficult. 

1. Make a financial plan

Living within your means requires a financial plan. A financial plan guides you in your spending and saving. Start by considering your major expenses, such as housing. For example, are you planning on buying your first home or upgrading to a bigger one? If so, does your budget allow for that?

Making a financial plan involves looking at the big picture. One of the goals is to ensure you’re living within your means and not living paycheck to paycheck. It also involves a plan to pay off loans and save enough money for short and long-term goals. 

2. Create a budget

Next, you need a budget that works for your family. You can use various budgeting types, including the 50/30/20 rule. This rule devotes 50% of your income for needs, 30% for wants, and 20% for savings. 

A budget is vital because it tells you how to spend your money before receiving it, which helps you spend it more appropriately when you get your hands on it. You can even make this a family event by including your kids and teens. When it comes time to work on your budget, ask them to help. Teaching your kids good budgeting skills helps them develop the right mindset for financial success. If you're not sure how to include them, turn to Greenlight's financial tools and educational resources. 

For example, you can set up debit cards of their own, connected to your bank account. Then, download the Greenlight app on their phones,* and they can monitor their spending. Greenlight even offers Cash Back and Savings features for kids to help them see the power of saving money.** Hands-on practices work well for kids of all ages.

3. Track your spending

It's not uncommon to feel like you don't even know where your money goes each month. If you feel this way, track it. Recording every expenditure can be an eye-opening experience. Use a budgeting app to record your expenses or type them into a spreadsheet. If you want your kids and teens to get involved, give them access to Greenlight's Financial Literacy Game. They'll learn helpful money-management tips as they play. 

4. Cut unnecessary expenses

Spending money on unnecessary things might cause you to spend more than you earn. First, though, you'll need to identify your unnecessary expenses, and this is why tracking your expenses is so important. Now, don't be surprised if your spending habits shock you after tracking them for a month. Instead, use this activity to make some changes to how you spend your money. 

Try this: After tracking your expenses for a month, categorize the spending and look closely at where the money went. Then, ask yourself if these expenses were necessary. This exercise can help you differentiate between wants and needs. 

For example, suppose you notice that you spent $250 grabbing lunch at restaurants last month. Was this expense really necessary, or is there a more cost-effective way to eat lunch? Chances are that you could save a significant amount if you brought your lunch most days. 

5. Set financial goals 

To learn how to live within your means, you may have to make a few changes in your finances, including setting financial goals. If you don't have any, set some. They don't have to be major ones. In fact, starting with small ones is a great way to begin. 

Building an emergency fund is a great first goal. Aim to start with $1,000 in your emergency fund and only use the money for true emergencies. After reaching this target, work toward saving enough to cover three months of your living expenses. 

Setting long-term goals for savings is also essential. This includes saving for education costs, retirement, and other larger goals. 

Another idea is to create a family vacation fund. Plan a family meeting to talk about this. You can discuss where you'd like to go, the costs of the trip, and ways to save enough money to reach the goals. This would also be a great time to talk to your kids about investing and money-saving options. You could even introduce them to Greenlight's investing app for kids to include them in the goal.*

Financial education for the whole family

When you spend within your means, you'll avoid debt and save more money. Making just a few changes in how you live can help you reach financial goals you never thought possible and give you the financial security you've always wanted. If you have kids, include them in this process to help them develop the right mindset and show them actionable steps to follow for the rest of their lives. If you don’t have any kids yet, someday you might, and then you can teach them the things you’ve learned. You can lean on Greenlight's resources to help you every step of the way. 

* ¹Greenlight is a financial technology company, not a bank. The Greenlight app facilitates banking services through Community Federal Savings Bank (CFSB), Member FDIC. **Greenlight + Invest families can earn monthly rewards of 1% per annum, Greenlight Core and Greenlight Select families can earn 2% per annum, Greenlight Max families can earn 3% per annum, and Greenlight Infinity families can earn 5% per annum on an average daily savings balance of up to $5,000 per family. Only Greenlight Max and Infinity families can earn 1% cash back on spending monthly. To qualify, the Primary Account must be in Good Standing and have a verified ACH funding account. See Greenlight Terms of Service for details. Subject to change at any time.