If your expenses are near or even above your expected income, it is time to make a firm commitment to simply live below your means.
I know this may seem impossible. But with a few lifestyle adjustments, you can achieve your goal.
Analyze your finances
For starters, begin to analyze your current financial situation. Compare your monthly expenses with your monthly income to gauge whether adjustments are necessary.
Simply determine how much each expense bites into your income. For example, if you earn $1,000 per month and pay $100 for charitable contributions, this would be 10 percent of your monthly pay.
After you determine a percentage for each expense, highlight expenses that take a huge bite of your monthly income.
Are you living in the red?
Next, determine whether you are living a lifestyle that puts you in the red. Do this by simply computing your debt-to-income ratio.
A debt-to-income ratio determines how much of your income is committed to debt, such as student loans, credit cards, mortgages, car loans and other liabilities.
Loan officers often use this ratio when determining whether to grant a loan. It also is used as a major factor in computing your credit score. Therefore, a high debt-to-income ratio could reduce your chances of obtaining a loan and also negatively impact your credit score.
The ratio is easy to compute. Simply take your total monthly debt and divide by your total gross monthly income.
Many financial institutions look for a score of 36 percent or lower when determining your financial health. But in general, the lower your ratio, the better.
Make the cut
If analyzing your finances reveals that you are not where you want to be, it is time to make cuts. Review big expenses and unnecessary debt, and cut areas that prohibit you from living below your financial means.
Although this may require some sacrifice, it can help provide you with the means to save toward a financial goal or provide necessary funds in the event of an emergency. Most importantly, you will rest easier knowing your finances are well under control.