Living on what you've got

There’s no denying it: You’ve only got so much money to work with. Learning to live on what you earn is a skill that’s vital to your financial well-being. In fact, ideally you want to live on less than you earn, called “living within your means.” That leaves you with money to save for the future, including a cushion for emergency expenses and a foundation for investments and savings for bigger goals, like buying a place to live or doing things you’ve always wanted to do, maybe visiting another country.

Checking your cash flow

What you want to do is to figure out how much money you have coming in each month and how much you have going out. This is your cash flow. To get the details in black and white, you can list all your sources of income for the month in one column and how much each one provides. Then keep track of all your expenses for the month — you can collect receipts in an envelope and mark down other expenses in a notebook — and tally them up in another column.

Click here for a cash flow worksheet

If you’ve got more money coming in than going out, congratulations — you’ve got a positive cash flow. That’s where you want to be. A positive cash flow means you have money left to save and invest for bigger things in the future or cover an emergency when you have one.

But if you’ve got more money going out than coming in, you’ve got negative cash flow, and that’s a problem. That means you’re borrowing money — you’re spending tomorrow’s cash today, by running up costs on your credit cards or dipping into your emergency fund or your college or retirement savings.

If you’re consistently spending more than you take in, you may be using credit irresponsibly to support a lifestyle that you can’t really afford. The sooner you get into the habit of living within your means, the less credit trouble you’ll get into.