There is a money trend happening right now that a lot of people seem to be on board with. It certainly isn’t a new way to live, but it is becoming more and more “trendy” and I couldn’t be happier. That trend is learning how to live below your means.
It is growing in popularity because people are becoming more conscious of how they are managing their money and striving to be more intentional with their spending because they are focusing heavily on their financial goals such as retiring early.
As I said, living below your means isn’t a new thing, people have been living below their means for a long time but now it is more of a choice to live this way rather than a way to survive out of necessity. These days, people are becoming much more aware of their finances and realizing the consumption lifestyle of buying everything you want, even if you don’t have the money right now, can lead to some pretty scary consequences like debt and bankruptcy when you can’t pay that debt off. (hello, credit cards, my old friends)
Learning how to live below your means can you help you achieve your financial goals sooner by freeing up more money to put towards debt, savings, and retirement. It is an important step in becoming successful at managing your money and being able to make smart financial choices.
After all, even if you have what most would consider a “comfortable” salary, your spending choices are truly what will make or break your financial situation. You could be making $100,000 per year and still be living paycheck to paycheck.
Before we jump into the learning process, lets take a minute to understand what living below your means really is, why you might want to live below your means, and then we will go over just how to do it so you can decide if living this lifestyle is something you can actually do in order to reach your financial goals that much sooner.
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What is “living below your means”
What does it mean to live below your means? Living below your means is, very simply, spending less money than you make. Although it sounds like such a simple, no-brainer way to live, it is much easier said than done. However, it is not impossible, you just need a plan, a why, some action and a lot of discipline.
I do not want you to mistake living below your means with living within your means. They are completely different ways to live with the latter being much less secure. While living below your means is spending less than the amount of money you make, living within your means is when you spend the same amount. Can you see why this isn’t a very smart choice?
When you spend all of what you bring in, you lose that margin for error and cushion of financial security. You lose your ability to save money or pay down your debt faster, grow your retirement or even the ability to take a vacation without going into debt. When you live within your means there is a higher likelihood of having to depend on credit cards, loans, and other debt to make ends meet, which ends up increasing your debt and causes your spending to increase to compensate for the higher minimum payments.
Why you should live below your means
There are many reasons why someone chooses to live below their means and many of those include financial goals such as:
- Saving money
- Building a retirement fund
- Paying down debt
- Reach financial independence
- Retire early
- Creating an investment portfolio
- Simplifying their life and finances
- Living and spending with more intention
- Understanding the true value of money
- Creating abundance in their life
- Living Comfortably
Whatever the reason you have for wanting to live below your means, make sure it is powerful enough to keep you going.
How to live below your means
Now that we have the “what” and “why” out of the way, let’s jump into my favorite part – the HOW!
1. Know how much money you make
The first step is to find out how much money you bring home. After all, you cannot start to live below your means if you have no idea what your means really is.
A key note here is to use your net income, not your actual salary amount. You want to use the net amount that hits your bank account every payday (after taxes and other deductions like health insurance, retirement, and other benefits). This is the actual amount you get to save and spend on bills, entertainment, and other expenses.
If you don’t know how to calculate your exact net amount because you either just don’t know how taxes work or because you have an irregular income or pay schedule just take a look at prior pay stubs or payment history and use an average of your take-home income for the past few months.
2. Reduce your expenses as much as possible
Once you have a good idea of the amount of money you will have available to spend, its time to review your expenses and reduce them as much as possible below your income.
You can do this many ways such as calling your service providers to negotiate a better price, switching to a different service provider with a lower price, or even cutting out unnecessary expenses like cable, eating out frequently, and other expenses you don’t need that you can go without, even if it is temporary.
There is certainly no need to go bare bones in this lifestyle by getting rid of every expense, especially for things you might love like going out to eat with friends or yoga class. If you were to take drastic measures like that it may just be a matter of time before you slip up because you are depriving yourself.
3. Create a budget
If you do not already have a budget in place, now is a great time to get started. If you need some inspiration here are some great posts on budgeting:
- How to Set Up A Budget
- 50/20/30 Budget
- How to Stick to Your Budget
- How to Use the Cash Envelope System
Having a budget in place when living below your means is crucial to long-term success. With a budget, you have an accurate picture of your cash flow and you will be able to see where your weak spots are so you can make improvements.
4. Increase your income
If you’ve trimmed your expenses as much as possible and still are not able to live comfortably below your means then its time to make more money. Again, much easier said than done, but it’s not as hard to make more money come your way as you may be thinking. There are tons of opportunities for side hustles that you have no excuses.
Here are some related posts on how to make money for some inspiration:
5. Avoid taking on more debt
Taking on more debt through the use of credits cards do not count as living below your means. Even though you technically are not spending any money right now, you will have to pay that back at some point along with a load of interest.
Avoiding taking on debt, or increasing the debt you already have, is important when living below your means. The more debt you have or take on, the higher your monthly payments will become, which will strain your budget and push your expense amounts closer to your income. When this happens you lose that buffer and will either have to make cuts to other expenses or take on the burden of having to find another income source. Just do yourself a favor and focus on paying it off and becoming debt free instead of taking on more.
Related post: How to Create a Plan to Pay Off Debt
6. Stop comparing yourself to others
The mentality of having to keep up with your friends is going to be your biggest enemy here. What you have to remember is that this is your life, your money, and your choice. You always have a choice.
I know its hard but learning to say no to going out constantly, shopping sprees, and surprise vacations, is what you will have to do to stick to your budget and avoid debt in order to live below your means.
You absolutely cannot compare yourself to others because you truly do not know what their financial situation is. They may be living like they have no cares and all the money in the world when the reality is that they are struggling living paycheck to paycheck. The only thing you should be comparing is your current situation and spending to what it was like before while striving to become the best you can.
Related post: How to Break Your Spending Habits
7. Build an emergency fund
Building an emergency fund is crucial to successfully live below your means. Having an emergency fund is having protection against large, unexpected expenses like a medical bill or car repair.
It’s best to start saving towards an emergency fund of $1,000 for everyday emergencies like those listed above. Once you have that in place start working towards a fund to cover you if you lose your job – this would be 3 – 6 months worth of your living expenses.
Related post: How to Build an Emergency Fund Fast!
Emergency funds are not for expenses you don’t need like the latest gadget or a fancy vacation or even a gorgeous new wardrobe. They are for serious financial emergencies.
8. Save up for large purchases
When you live below your means with money left over after expenses you have the ability to save money. You can put this money towards whatever you want like an emergency fund, retirement, and large purchases like a vacation, car, and down payment for a house.
It’s common practice these days for people to pay for their vacations or a new TV with credit and not even blink an eye. Instead of using a credit card, a smarter choice would be to put off the purchase until you have saved enough cash to cover the expense without having to depend on a credit card. Not only will you avoid debt and interest, but you will also give yourself time to decide if that purchase is truly what you want and is in line with your financial goals.
Also, when you use cash to pay for large purchases you may find it easier to say no to these purchases since you truly know how much time, energy, and discipline it takes to save that much money.
Always remember, if you cannot afford to buy something without using a credit card, you truly cannot afford it.
Related posts for saving money:
Living below your means is an amazing way to save more money, pay off debt, build your retirement fund and reach financial independence faster. It allows you more freedom with your money by giving you the ability to choose what you do with your money instead of living paycheck to paycheck and struggling to make ends meet.
Learning to live below your means may be a huge lifestyle change but with a solid plan and a lot of action, it can be the best choice you ever make.
Other posts you may like:
- 8 Tips to Make Your Savings Grow
- Why You Should Always Pay Yourself First
- How to Set Financial Goals
- How to Live On One Income
- 10 Money Management Tips
- How to Manage Your Money in 8 Easy Steps
- How to Use Mindfulness to Manage Your Money