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By Jean Chatzky
It’s a universal goal: Living on what you make. And luckily, it’s not too hard to accomplish it, if you know a few simple rules.
Something interesting happened during the recession: Budgeting suddenly became cool. We were all trying to pinch our pennies, save a dollar, live within our means (after all, living outside of them is at least in part what got us into this mess). Doing this means doing two things – consistently.
Live on your net, not your gross
Plan your spending based on your take home pay. You likely don’t see a third of the dollars you take home. They’re pulled out by your employer and funneled toward taxes, health insurance, and Social Security. So if you’re budgeting based on your annual salary – taking that number, dividing it by 12 and spending accordingly – you’re headed straight for trouble. Instead, plan on the money that lands in your bank account each month. Then…
Pay yourself first
Subtract savings off the top, before anything else.. You should aim to save 10% of your income – more if possible. In financial circles, this is called “paying yourself first.”
Now you have a chunk of change that is yours for the spending every month. The rest is simply a puzzle, though most people approach it the wrong way, by trying to fit their monthly expenses into their monthly income. That’s an easy way to overspend. Instead, use your income as a guide, and scale your monthly expenses to it.
And if you hit a wall?
Consider trying to make more money. Easier said than done, yes. But possible. If you have the time and talents to moonlight on the side – whether at the local coffee shop, by selling the products of your creative side on a website like etsy.com, or taking on a freelance gig or two in your field – you’ll have more income to spread around.
Or work the other side of the equation by cutting your expenses. You may find that by living on your post-tax, post-savings income, you can no longer afford the most cable channels, or unlimited texting, or your hefty car payment. It’s time to cut back. Start with relatively painless changes: Call your cable company. They may give you a discount if you threaten to cancel or scale back your package. Do the same with your cell phone, your internet provider, your insurance, even your electric (if you live in a state that doesn’t regulate energy prices, you can shop for the cheapest option). Then think of lifestyle changes you might be able to make, like having a “girls night” at home instead of at a restaurant, or trading your car in for a cheaper model.
Finally, live your own life. We all have a friend who can seemingly afford everything we want – and on a similar lifestyle. I’m here to tell you two things: First, stop comparing. And second, that’s a sham. That friend may not be saving her 10%. She may have thousands of dollars in credit card debt. Or maybe she has an income source you don’t know about – a side job, an inheritance, a trust fund. Having a healthy financial life means living within your own means – not the means of your neighbors or friends.