Are you living within your means?

Posted on 22 January 2024

Written by Laura Kemp

In a world facing ongoing economic shifts and financial uncertainty, it is more important than ever to regularly review your financial health. A critical question that is often asked is ‘am I living within my means?’ This single question goes beyond simply budgeting, and delves deeper into a thorough analysis of your income, expenses, and overall financial habits. It is all too easy nowadays to spend more than we can afford, thanks to the convenience and accessibility of credit, a rising cost of living, and social pressure to keep up appearances. Living beyond your means can have grave consequences, often leading to spiralling debt and impacts on your credit report. In this article, we share the importance of checking ‘are you living within your means?’, the importance of doing so, as well as signs that you may be veering away from this path and how to keep on track.

What does ‘living within your means’ actually mean?

Living within your means essentially means that your expenses do not exceed your income. It is about striking the right balance between your financial income and outgoings, ensuring you can afford your living essentials, save for your future, and even enjoy your money without spending too much or accumulating debt. When living within your means, you are much better prepared to handle any unexpected expenses, and to build a strong financial foundation. 

What are the signs you are not living within your means?

If you are not regularly creating a budget and tracking your spending each month, what might seem like a few harmless purchases can quickly accumulate. This is even more likely to occur when there is no limit to our spending, especially when using credit cards or lines of credit where we will often have access to at least double our monthly income. Here are some of the key signs you might not be living within your means:

Consistently overspending 

If you feel that you are often spending more than you earn, this could be a red flag that you are living beyond your means. This, in turn, can lead to credit card debt, taking out personal loans, and mental health problems including financial stress.

Having a lack of savings

Very little or a complete lack of savings can indicate that your expenses are much higher than your income, which in turn can mean there is very little room to plan for the future, or any emergency fund for life’s surprises.

Relying on credit cards

If you rely on your credit cards the majority of the time to cover your basic living costs – or indeed, to make ends meet – it is a good sign that there is a major misalignment between your income and your spending habits.

Not having a budget

Neglecting the creation of a budget that you can stick to signals financial instability. Creating a budget can essentially be viewed as a financial roadmap. It can help you to allocate your funds and to track your financial progress.

Relying heavily on debt

By relying heavily on loans or building up debt continuously without having a clear plan for your repayment signals that you are leading an unsustainable lifestyle, and one you can likely not afford.

How to tell if you are living within your means

There are a few quick steps you can follow to understand if you are living within your means consistently:

  1. Create a spreadsheet that has six columns (one for each of the last six months), and three rows for your income, expenses, and the difference between the two numbers.
  2. Download all of your online banking statements, as well as any credit card statements for the last six months.
  3. Add your income and expenses into the spreadsheet for the last six months. 
  4. For each of the past six months, take away the expense row from the income row. Add this number into the ‘difference’ row in your spreadsheet. If you find that the number is more than zero, you were living within your means for that specific month. If it is less than zero, you are living beyond your means.
  5. Add each of the ‘difference’ cells together. This will ultimately tell you if you have lived within your means (if there is a positive figure), or beyond your means (if there is a negative figure) in the past six months.

Why might someone be living beyond their means?

There is often a negative stigma that only people who are frivolous with their money or have no willpower are living beyond their means. This is far from the case, however. There are a few reasons why some Canadians may not be able to live within their means:

  • Unaffordable living arrangements. Mortgage payments or rent are most likely your largest monthly expense. While experts recommend that your housing expenses should be below 30% of your gross income to remain affordable, this is particularly challenging when real estate and rent is becoming increasingly expensive across Canada, especially in major cities. With this rising price outpacing any increase in your salary, you will likely find you have less left over at the end of the month.
  • The rising cost of groceries. Food is a cost you cannot avoid that can affect your spending each month. Even a few handfuls of essential staples at the supermarket can quickly add up, and money is not stretching as far these days. Even ordering takeout, coffees, or going out for an occasional meal at a restaurant can escalate the costs you spend on food each month.
  • Unexpected bills. It happens to us all – an unexpected or forgotten payment that needs to be made. Whether it is home maintenance, car repairs, or medical bills, unexpected payments can sometimes cause us to be living beyond our means. Sometimes, this is short-term, but other times it can have impacts for the longer term too.

At Spergel, our ‘get rid of debt’ team have seen it all. We treat every individual we meet with compassion and understanding, focused solely on helping to resolve the problem without judgement. If you are concerned that you might be living beyond your means, we are here to help you get your finances back on track.

How to ensure you are living within your means

We know that nobody intends to live beyond their means. Sometimes, it simply happens and can quickly spiral. With good planning, you can work to take control of the expenses in your life to make them manageable. Here are our top tips to ensure you are living within your means.

Create a realistic budget

A good place to start is by creating a realistic budget that you can stick to. Set out by outlining your monthly income and expenses, and be realistic about your spending habits, allocating funds to essentials, savings, and disposable income. The 50/30/20 method is a good place to start. 50% of your income could go towards your living expenses and essentials (rent, groceries, etc); 30% towards any non-essential purchases (dining out, shopping, vacations, etc); and 20% towards your savings or paying off debt. At the end of each month, review your purchases and how your spending aligns with your 50/30/20 plan. If you are repeatedly spending more than the recommended amount in any category, investigate why and adjust your costs as necessary to strike the right balance.

Build an emergency fund

Given life’s twists and turns, it is important that you establish an emergency fund to cover any potential unexpected expenses. You should aim to save at least three to six months’ worth of living expenses as a financial safety net. This can help to take the edge off of any unanticipated costs and prevent you from repeatedly living beyond your means. You could get started by putting aside a couple of hundred dollars each month, and aim to work towards a larger goal over time as you get better at spending according to what you can afford.

Strive to live below your means

Instead of spending to your limit, work to live below your means. This will help you to have surplus funds to save, invest, or address any unanticipated financial challenges. This also involves being mindful of your credit use. Borrowing money doesn’t always mean simply repaying the same amount. Often, there is interest across the balance that you need to factor in also. Each month you borrow, it compounds on the previous months. This in turn makes your payments higher, meaning you have less income available for your everyday essentials. And, it’s psychological, too. The more you use credit, the more you will generally rely on credit to make ends meet, often making a credit cycle very difficult to break.

Get a fresh financial start

If debt is making your life more difficult and potentially meaning you are not living within your means, you may well need a fresh financial start. At Spergel, we have a whole team of ‘get rid of debt’ experts. Our experienced Licensed Insolvency Trustees are the only professionals in Canada legally able to file all forms of debt relief, making them well placed to assess your financial situation and advise you on what to do next. No matter how bad you might feel your scenario to be, there is always a solution. We offer a free, no obligation consultation to discuss your options to achieve the fresh financial future you deserve. You might wish to file a consumer proposal – a popular bankruptcy alternative – to reduce your debts by up to 80% while keeping your assets. Alternatively, filing bankruptcy can provide permanent debt relief, and you will gain helpful skills on budgeting and money management along your journey.

Are you living within your means? FAQs

Here are some of the most commonly asked questions about living within your means.

How do you figure out if you are living within your means?

To establish whether or not you are living within your means, you should assess your income against your expenses. Create a detailed budget outlining all sources of income and monthly expenditures, including essential costs like housing, utilities, groceries, transportation, and healthcare, as well as discretionary spending on entertainment or dining out. Ensure that your total expenses do not exceed your income. You might also want to factor in savings for emergencies and long-term goals like retirement. Regularly review and adjust your budget as circumstances change, ensuring a balance between spending and saving. If you consistently meet your financial obligations and have room for savings without relying on credit extensively, you are likely living within your means.

What is an example of living below your means?

Living below your means involves spending less than your income, allowing for savings and financial security. For example, if your monthly income is $4,000 and your essential expenses (housing, utilities, groceries, transportation) total $2,500, allocating only $500 for discretionary spending on non-essential items like dining out, entertainment, and personal luxuries would be an example of living below your means. This leaves a surplus of $1,000 that can be used for savings, investments, or paying off debt. Prioritizing needs over wants and avoiding unnecessary debt are key principles of living below your means, fostering financial stability and resilience.

Living within your means is not just a financial principle – it is a mindset that fosters stability and resilience in the face of economic uncertainty. Regularly reviewing your financial health, addressing warning signs, and making informed decisions will create a more secure and fulfilling financial future. Book a free consultation with an expert Licensed Insolvency Trustee at Spergel to begin living within your means today.

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Laura Kemp

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