One of the biggest changes you can make in 2021 is to live within your means. Preferably, live below your means just a bit. To those not living within their means, this is the number one reason you may not be on pace to successfully fund your retirement.

Simply put, living within your means is when you spend less(or equal to) than what you take in. Of course, there are some circumstances, such as a job loss, that makes this almost impossible on a short-term basis. But, on a long-term basis, it is essential to accumulate wealth. There are 3 big consequences of living too large for your income. First, chances are that you are racking up bad debt such as credit card balances that you can’t pay off in full. Second, you are probably not saving enough. It’s almost impossible to do so if there’s no positive cash flow. Third, from a behavior standpoint, you get accustomed to a lifestyle that you cannot pay for and probably doesn’t bring you true happiness.

Steps to Take Now

You need to see how you are spending your money. This means creating a budget.  You can do this on a piece of paper, create a spreadsheet, or use budgeting software. An easy way to analyze your spending is to use the 50/30/20 budget rule. Here’s how it works. Divide up your after-tax income and allocate it to your spending: 50% on needs (essential-food, shelter, healthcare), 30% on wants (non-essential-entertainment, memberships, fun things), and socking away 20% to savings/debt reduction. If your spending ratios are not close to this, then you need to make changes.

If your ratio is something like 70/25/5, examine your big expenses such as rent/mortgage or owning a car. If you are locked into these big expenses, it may take a while to unwind them. If you are about to make these big purchases, be careful with them. Consider the cost of buying a new car. The average monthly payment on a new car was $523 in the first quarter of 2018, according to credit reporting agency Experian. But that's far from the true cost to own a car. For vehicles driven 15,000 miles a year, average car ownership costs were about $706 a month, in 2017, according to AAA. That includes maintenance, gas, insurance, etc. Do not let the heavily marketed auto industry destroy your retirement.

If your ratio is closer to 50/45/5, you need to adjust your daily spending choices. You need to be honest with yourself here. I’m not recommending that you never go to Starbucks or that you shouldn’t join a health club, just make sure your choices make sense for your income level. Figure out how to spend your money to make you happy, but within a controllable budgeted amount.

Once you analyze your spending and pinpoint changes you can make, start them now. You will feel empowered by your money, not trapped by it. Your debt will shrink, your savings will increase, you’ll grow an emergency fund, your credit scores will rise, and the stresses brought on by living above your means will start to fade away.