Living below your means.  Sounds simple, right?   But it is astounding how many Americans live far beyond their means.  According to the Young Americans Center for Financial Education, the average American family has a savings rate of negative .5 percent.  And America Saves 2008 Report indicates that barely a quarter of American families save the recommended 10 percent of income.

The benefits of living below your means are tremendous. Adequate retirement funds, possible early retirement, more security, provision for the next generation, financial freedom and all-around less stress are hallmarks of a spend-less-than-you-earn lifestyle.  So why is it so hard to do? 

The following five steps will help you combat the credit card lifestyle our culture embraces and encourages.

Record your financial picture- Most people know exactly how much income they have.  But many of those same people would be hard pressed to tell you exactly how that income is spent.  Take thirty days to record and categorize every penny of income and expense your household uses.  You need a clear picture of where your money is going in order to change its course.

Some simple (and free) budget software include BudgetMaster, Budget on Web, and Microsoft’s own Accounting Express 2008.  Or you can simply get out a notebook and paper.  Either way, keeping track of your families income and expenses is the first step to living below your means.

Evaluate your financial picture-

Now that you’ve recorded your expenses, the next step is to understand them. Calculate what percentage of your monthly income is spent in each category.  For example, if your monthly income is $4000 and you spent $400 on groceries, than you spent 10% of your income on groceries.  Figure out percentages for each of your spending categories

Most financial planners advise a certain maximum percentage to be spent for each budget category.  For example, Crown Financial Ministries recommends that no more than 36% of income should go towards housing, 12% towards food, 12% towards auto.  Dave Ramsey recommends 25-35% for housing, 5-15% for food, 5-15% for transportation. Now that you know exactly what percentages you are actually spending (and it may be quite surprising!), it’s time to make some changes.

Adjust your financial picture-

Identify the budget categories where you overspend and begin to make changes.  It’s harder than it sounds; I know.  But realizing that you spent 28% of your income on entertainment when the recommendation is 8% may be the motivation you need to just say “no” to another dinner out.   Brainstorm with your spouse to find ways to reduce spending in all categories in which you overspend.  Hold each other accountable, but be realistic.

Let go of the plastic-

Even the best-intentioned budgeter can easily be swayed into impulsive buys by the lure of buy now, pay later.   Many experts recommend freezing your credit cards in a block of ice (thus ensuring a long think-it-over time while it thaws).  Others advise to simply cut up all cards and discard.  Whatever the case, don’t apply for new credit cards while you are attempting to reduce your spending.

Build your savings-

Almost all financial planners recommend that at least 10% of your income should go into long-term savings.  And most experts also advise having an emergency saving fund equal to 3 months income.  A strong savings account can help prepare for your future and prevent disaster during times of financial emergency.

Remember, living below your means does not equal a no-fun, boredom filled life.  Rather, living within the boundaries of your income offers freedom, security and peace.

Is the cash envelope system for you? When you think of people who live their lives with the cash envelope system, what words come to mind? Irresponsible? Old-Fashioned? Poor?

That’s what I always too. I turned up my nose at those people with their little envelopes labeled “Food” and “Gas”. “Hmmph! They must have such bad credit they can’t even get a bank account!” is exactly what I thought as I swiped my credit card through the machine.

And then one day as my husband and I were having our monthly “where did all our money go?” discussions, we got the crazy idea of actually creating a budget and sticking to it. In my search online for “the perfect budget”, I kept hearing about those little envelopes again.

“Ok – let’s give it a try. But I’m sure it won’t work!” Not only did it work, but I haven’t spent this little money since I was 16 and working for $3.35 per hour!

There is something very powerful about handing over cash at the store, rather than just mindlessly swiping your card. If you only have $30 that week for eating out you start to think: “Do I really want the Extra-Tall No-Foam Double-Shot Soymilk $5 Espresso? Or will I be happy with a $1.29 House Blend?”

So how does one get on a cash system?

1) Create a budget .
2) Once you have your budget, you simply figure out what parts of your life you want to handle as “cash-only”. For most, this will mean everything except housing, utilities and loan/credit card payments.

We use envelopes for:

• Grocery
• Gas
• Clothing
• Entertainment
• Babysitter
• Gifts
• Church
• Dining Out
• Mad Money

The envelopes get refilled every two weeks and once the money from one envelope is gone, that’s it for that category until the next payday. In the midst of all of this, the credit and the debit cards are out of your wallet. You are paying cash now!

For some people, this will become a whole new way of life. Even those who aren’t ready to make the full transition can benefit from just a few weeks or months of this system. It is a great way to finally figure out who is getting your money each month!

When she isn’t filling her envelopes and looking for the prettiest envelopes available, Mindi can be found at Moms Need To Know.

Photo by sunshinecity

One of the ideas suggested for reducing debt and saving money is a cash budget. This means using a limited amount of cash to pay for most of your daily purchases instead of your credit card. Have you thought about making the change?

A cash budget might be for you if:

1. Cash feels harder to spend. Sometimes handing over crisp dollar bills makes you think twice about the amount.
2. You don’t pay the full credit card balance every month. If the balance on your credit card bill continues to go up instead of down, a cash budget could help keep a limit on it.
3. Using cash helps you plan purchases more carefully. No one wants to discover in the grocery checkout line that there’s not enough cash to cover the total. Knowing there’s a limit to what you can buy helps you prioritize purchases, instead of relying on the credit card to cover all of it.

You may not want to use a cash budget if:

1. Cash or card makes no difference. If it’s all the same money to you, the convenience of a credit or debit card can outweigh the tangible reminder of using cash.
2. Your card gives rewards or cash back. Incentives like these can significantly add up in a year, assuming the benefits are greater than any interest or fees.
3. The list of transactions on the statement is helpful. Seeing all the transactions on the monthly statement can be easier than trying to keep track of every cash purchase.

Do you use a cash budget, or primarily a credit or debit card? Or do you use a combination, such as the credit card for gas and then cash for other things? What works for you?

Rachel loves writing about ideas to simplify your home at Small Notebook. She lives in Texas and often eats ice cream for breakfast.

If the thought of paying off your debts is simultaneously appealing and overwhelming, these five tips may help you get started or keep you going:

1. If you have one debt that’s significantly smaller than the others, tackle it first, even if it has a lower interest rate. You’ll feel a tremendous sense of accomplishment - and relief! - when you pay that debt off.
2. Rank the debts in the order you are going to pay them off - you can continue to pay off the smallest debt first, or put the debt with the highest interest rate at the top of your list. Use whichever method gives you the greatest sense of accomplishment, because that’s the one you’ll stick with. Put all of your extra money toward the first debt and pay the minimum on the other debts. When you pay off a debt, the next month the money goes toward the next debt on the list. (Note: this is the debt snowball method.)
3. Make as many payments toward the principal of the loan as you can. If you receive a monetary gift, send in an extra payment. Hold a garage sale or sell some stuff on eBay. (Click here for tips on holding a successful garage sale.) Sell books you’re not going to read on Amazon (click here for ips about selling on Amazon). Take old clothes to a consignment store or donate them and apply the money you saved on taxes toward your loan.
4. Use Bankrate.com’s loan calculator to figure out your repayment schedule and print it out - each month, you’ll be able to see the balance of your loan go down.
5. Set mini-goals and reward yourself. Make a list of little, affordable rewards, like a massage. After you pay off one debt, use the money that you used to put toward that bill to treat yourself. The month after that, start applying the money to the next loan on your list.

Find more articles like this at Chief Family Officer, where Cathy writes about family finances, cooking, and parenting.

Source

How many credit cards do you have in your purse/wallet (including department store cards, gas cards, major credit cards, home improvement cards, etc.). C’mon be honest, I’ll vote with you!

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Darla is the Editor for the Financial Channel on Blissfully Domestic and blogs at Sassy Homemaker.

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