What does it mean to live within your means?
So what is living below your means, anyway? Living below your means is part of the foundation to building wealth. Until you can learn how to live below your means consistently, you’ll struggle with learning to save and remain debt-free.Simply put, it’s spending less than you’re earning. It’s a simple concept, but it can be challenging to achieve, especially if you’re used to impulse shopping and trying to keep up with the neighbors.The good thing is, financial independence can be achieved on just about any income by learning to live below your means. It’s about adjusting your expectations, spending, and personal finances to create the financial future that you want.
How to know if you’re not living below your means?
If you’re wondering if you’re spending more than you’re earning, here are some red flags that tip you off:
- You’re not paying off your credit cards in full every month. Carrying credit card debt means you’re spending more than you have every month, especially if it continues to go up.
- You don’t have an emergency fund. It’s a very important thing – especially now – to have three to six months of expenses socked away, just in case. If you don’t have a fully-funded emergency fund, and you’re not making it a priority, you’re not living within your means.
- You aren’t using sinking funds. Sinking funds are the best way to save up for irregular expenses, like vacations, yearly bills, or household expenses that aren’t due every month. If you’re not prepared for them and have to throw them on a credit card, you’ll be digging yourself deeper into a hole.
- You are saving anything or contributing to your retirement. It’s hard to do these things and often takes a while to get there. Don’t think you’re failing at finances if you’re not doing these concurrently – or at all. It’s just something you have to work your way towards as you pay off debt and square up your finances.
- You’re spending more than 25% of your take-home pay on your mortgage/rent. You could argue that if your other expenses are minimal, this one doesn’t apply; however, it’d mean we’re overspending for the large majority of us.
If you’re not living below your means, you’ll struggle to make ends meet, find the money for emergencies, and cover off on irregular expenses.
Should you live below your means?
Absolutely! Learning to live on less than you make is a great way to stop lifestyle creep. Every time you get a raise or bonus, it’s so unbelievably easy to fritter it away and not even pay attention to where it goes. Learning how to put those raises and bonuses into savings or investments is a great way to keep from wasting them and continue to live below your earnings.
What are the advantages of living on less than you make?
Now that we know how to tell if you’re overspending let’s talk about why it’s essential to learn how to stop spending money you don’t have. Learning live within your means has so many benefits, including:
- No longer living paycheck-to-paycheck means less stress. Seriously, I think we could all use a lot less stress these days. Not worrying about how you’re going to pay for an unexpected expense is worth its weight in gold.
- No debt means it’s easier to build wealth. Living without debt is absolutely amazing and makes you feel so financially free. And using less money that can now go to debt payments for investing, savings, or retirement is even better.
- Having more financial flexibility means more freedom. If you want to take a weekend trip to your favorite aquarium a couple of fo states away, you can. Having that extra money every month means you can earmark it for whatever you want – whether it be last-minute trips or home improvement projects.
- Your credit score isn’t as volatile. A significant factor in your credit score is your debt-to-credit ratio. The less of your available credit that you use, the better your score. Having a better credit score means you’ll get better interest rates on mortgages, loans, and even auto insurance.
- You’ll have more to give. When you have fewer financial obligations, you’ll be able to donate more to your favorite charities and causes.
How do I stop living beyond my means?
Stopping spending more than you make can be tricky, primarily if you’re used to a particular lifestyle. While there are no living below your means calculator, there are lots of great tips and tricks to help you get only spending what you make:
Step 1: Figure out how much you earn.
Until you know how much your family is bringing in, you’ll never know where you stand. The first step is to add up any income, wages, tips, child support, or alimony.
Step 2: Track your spending.
The only way you can budget – and cut overspending – is to know what you’re spending. I suggest entering all of your accounts into software like YNAB or Mint and look at the past three months of spending. The best part of these applications is that you can see what budget categories you consistently overspend in and where you can cut back. Review your bank account, loans, and credit card bills to see what you’re spending your money on.
Step 3: Create your budget.
Like diet plans, there’s no one-size-fits-all when it comes to budgeting. Everyone’s different, and what works for one family might not work for another. While I can recommend a couple of budgets, it’s ultimately up to you to figure out what works. To get started, review my guide to budgeting.
Step 4: Negotiate bills.
Now that you know what you’re spending in each category, there’s an excellent chance you can easily see where you’re overspending. Cable, internet, and cell phone bills are notorious for being overpriced. Try out services like Trubill or Trim to help you get the best deal with your current providers. Not sure which to try? Read more about Truebill vs. Trim.These services can also help you with fees from your financial institution, medical debt, and other unnecessary expenses like unused subscriptions. It’s an easy way to trim your monthly expenses with mimimal work.
Step 5: Cut any other budget items that aren’t important to you.
It’s incredible how many fees and extra expenses we overpay, even though they aren’t something that contributes to our happiness. Figure out what costs are essential to you, and then cut or downgrade the rest. Some ideas include:
- Avoid late fees, overdrafts, etc.
- Drive used vehicles.
- Consolidate loans or debt to save on interest.
- Downsize your home if it doesn’t fit your needs.
For more tips on how to cut your budget:
Step 6: Put away your credit cards.
To stop yourself from throwing any small purchases onto your credit card, try using debit cards or cash envelopes. This is a great way to teach you to live below your means, and that once the cash in an envelope is spent, it’s gone. Any extra left at the end of the month can be moved to a rainy day fund.
Step 7: Pay off debt.
Any debt you make monthly payments to needs to go. Use the extra money you get back from trimming expenses to accelerate and pay off debt early. You’ll not only free yourself from those payments but save money on interest as well.
Step 8: Start saving.
Now that you’ve tackled your debts use that money to begin building your savings account. Build up an emergency fund of three to six months of expenses, and then make it a habit to save or invest at least 10% of each paycheck. Don’t forget to set up an automatic transfer so that you’re paying yourself first. Often, people say the key to financial success is paying yourself first – so make it automatic for peace of mind, and so that it doesn’t get easily brushed off!
Step 9: Set financial goals.
If you don’t have concrete financial goals outlined, you won’t get ahead financially. The only way to get rich by living below your means is to give that money that you’re saving a job to do. Figure out what your next savings goal is. Maybe it’s some big purchases, like a boat or tv? A vacation to someplace tropical? Saving up for braces for your kids? Whatever your savings goals are, having one (or more) and focusing on it will really help you adjust the amount of money you spend.
Step 10: Adjust your mindset to match your goals.
It’s difficult to watch everyone around you spending cash like the world’s going to end tomorrow. I get it – it can be hard not to be jealous when your neighbor rolls up in a brand new car that they’ve spent so much money on. You have to remember to think long-term and focus on your goals. A positive money mindset is a key to achieving your goals. To learn more about how to hone one, check out my favorite book about money mindsets.Don’t forget the importance of surrounding yourself with like-minded folks who have similar goals. Joining Facebook groups or local community groups can be helpful with staying focused and on the right path. Use these at home date night ideas to talk budgets and save money, and get your partner on the same page.Lastly, don’t forget to look for resources like blogs, courses, podcasts, or books to help you continue learning about money and your relationship with it. Check out these great financial freedom quotes or inspirational quotes on finances to help keep you motivated if stuff gets tough!
Step 11: Pick up a couple of side gigs to boost your monthly income.
If you find that you still can’t live within your means, you’ll need to find ways to bring in additional income. The best way to do so is to pick up a side hustle or a second job that you can do outside of your regular work hours.Luckily, there are tons of great online, and in-person side hustles you can do to help you earn more. These are some of my favorite ways to boost my earnings:
Living below your means is the best way to start building your financial security and grow your wealth. More importantly, you learn not to try and keep up with the Joneses and find contentment in what’s already around you. And there’s nothing richer than that.Do you have any questions about how to live below your means? Please post them in the comments below!