Are you tired of living paycheck to paycheck and struggling to make ends meet? It might be time to start living below your means. This means spending less money than you earn and saving the excess for your future goals.
It’s a simple concept, but it can be difficult to put into practice. In this article, we will explore the benefits of living below your means and provide some tips on how to get started.
Given the current uncertainty, it is crucial to have a financial safety net in place to help you get through unexpected events. However, many households in the U.S. have less than $10,000 in liquid assets. This is usually not enough to cover even a few months of average living expenses.
To build up your emergency fund effectively and quickly, you need to start living below your means. This means spending less than you earn and saving the excess for emergencies.
Benefits of Living Below Your Means
The key to living below your means is to spend less than you earn rather than staying in line with your peers. There are several benefits to living below your means:
- Financial stability: By living below your means, you can save more money and have a financial cushion in case of unexpected expenses or emergencies. This can provide a greater sense of financial security.
- Debt reduction: Living below your means can help you pay off debt more quickly, as you’ll have extra money to put towards your payments. This can help you get out of debt faster and achieve financial independence.
- Increased savings: By spending less than you earn, you’ll have more money to put into a savings account or investments. This can help you build wealth over time and prepare for the future.
- Freedom of choice: Living below your means can give you more freedom and flexibility in your financial decisions. You’ll have more disposable income to put towards the things that are important to you, rather than being tied to a high cost of living.
- Less stress: Living below your means can help reduce financial stress, as you’ll have a better handle on your expenses and be better prepared for unexpected events.
- Better relationships: Financial stress can put a strain on relationships, as it can lead to arguments and tension. By living below your means and having a better handle on your finances, you may experience less financial stress, which can help strengthen your relationships.
How to Live Below Your Means
Want to start living below your means? Here are some tips and strategies to help you get started:
1. Evaluating Your Current Spending Habits
To evaluate your current spending habits, you can start by tracking your income and expenses for a period of time. This will help you see where you’re spending money. It will help you identify areas where you may be overspending or where you have room to cut back.
Here are some steps you can take to evaluate your spending and identify areas where you can cut back:
- Gather financial information: Collect all of your financial statements, including bank statements, credit card statements, and bills.
- Create a list of your income and expenses: Make a list of all of your income sources and all of your monthly expenses, including both fixed and variable expenses. Be sure to include everything, from rent and mortgage payments to coffee purchases and streaming subscriptions.
- Identify patterns and trends: Look for patterns and trends in your spending, such as recurring expenses or times when you tend to spend more money.
In reviewing your finances, there are a few key things to look for.
Do you have a sufficient emergency fund?
Most financial experts recommend that you have at least three to six months of essential living expenses set aside in case of emergencies. As economic and political volatility increase, you should also consider increasing the amount of your emergency savings fund. Having an insufficient emergency fund is a clear sign that you are living beyond your means.
What is your savings rate?
While there are many ideas about how much of your income you should save, 10% is a good baseline. People often prioritize saving for retirement through assets like 401(k) plans, IRAs, and pensions. But these assets are not easily used for emergencies, so you should ensure that you are also putting some aside in highly liquid, easily accessible savings accounts.
If you are consistently saving 10%, but it’s all in a 401(k), you may be well-positioned for retirement, but you may still be living beyond your means.
What is your debt load?
Do you know how your total debt compares to your income? Another guideline for you to consider is the 28/36 rule. According to this rule, you should spend no more than 28% of your income on your housing. This includes your mortgage and associated expenses like property taxes and insurance.
If you add in other debt, such as student loans, car loans, and credit card debt, your total debt payments should be lower than 36% of your income.
So, what should you do if you find that you are indeed not living below your means?
2. Eliminate Unnecessary Expenses
The biggest enemies of financial health are impulse spending and buying things that are not necessary. Is your current phone working well? Then, maybe you don’t need to spend $1000 to get the newest version.
Does your office have free coffee? Then, avoid stopping at Starbucks on your way to work every day. Learning to restrain your impulses is key to living below your means.
Better yet, restraint helps you build wealth. Just ask Warren Buffett, one of the world’s richest men. He has lived in the same house since 1958, and he buys used cars to keep his costs low and minimize losses from depreciation. Living this way for years helped him become the successful billionaire he is today.
3. Create and Follow a Budget
Budgeting is one of the most important things you can do to get your spending under control. There are many excellent budgeting apps available to help you, and there is a system for everyone.
A great option for budgeting for beginners is the envelope budgeting system. You distribute your available assets and expected income into different “envelopes,” each of which represents a particular expense (e.g., mortgage, car payment, groceries, utilities).
Then, each month you limit yourself to spending what is in the envelope. If an expense exceeds what is in the envelope, you must take it from a different envelope.
Another option is zero-based budgeting, where you allocate all of your monthly income to expenses, debt payments, and savings.
Budgeting may not be fun, but it is simpler than you think and incredibly helpful in starting to live below your means.
4. Monitor Your Spending
There are a few different ways you can start monitoring your spending more closely:
- Track your expenses manually: Keep a record of every purchase you make, either by writing it down in a notebook or creating a spreadsheet on your computer. This can help you get a better understanding of where your money is going.
- Use budgeting apps or software: There are many budgeting apps and software programs available that can help you track your spending and create a budget. These tools often allow you to connect your bank account and credit cards, so your expenses are automatically tracked.
- Use cash: Consider using cash for some or all of your purchases. This can help you be more mindful of your spending, as you’ll be able to physically see the money leaving your wallet.
- Monitor your bank account and credit card statements: Regularly reviewing your checking account and credit card statements can help you identify any unnecessary or unexpected expenses.
By implementing one or more of these strategies, you can get a better understanding of how you spend money. This allows you to start making any necessary changes to improve your spending habits.
5. Improve Your Mindset
Improving your mindset involves changing the way you think about and approach money. Here are some tips for improving your money mindset:
- Educate yourself: Increase your financial knowledge by learning about budgeting, saving, investing, and other financial topics. This can help you make more informed decisions and feel more confident in your financial abilities.
- Set financial goals: Determine what you want to achieve financially, whether it’s paying off debt, saving for a down payment on a house, or building an emergency fund. Having clear financial goals can help you stay motivated and focused on improving your financial situation.
- Practice gratitude: Instead of focusing on what you don’t have, practice gratitude for what you do have. This can help shift your mindset from a scarcity mentality to an abundance mentality, which can help you feel more positive about your financial situation.
- Surround yourself with positive influences: Seek friends, family, or mentors who have a positive mindset and can provide guidance and support. Avoid spending time with people who are constantly complaining about their finances or promoting unhealthy financial habits.
- Seek professional help: If you’re struggling with a negative money mindset, consider seeking help from a financial planner or therapist. They can provide valuable guidance and support as you work to improve your mindset.
By implementing these strategies, you can work to improve your mindset and develop a healthier, more positive relationship with money.
6. Keep Learning
There are many resources available online that can help you live frugally while still enjoying your life. These resources can provide valuable information on budgeting, financial planning, investing in the stock market, and much more. In fact, there are many free courses and resources that can help you learn about these topics and achieve financial freedom.
By taking advantage of these resources, you can gain a greater understanding of how to manage your money and achieve your financial goals. To achieve your goals, it’s also wise to seek information and learn about financial topics.
This may involve reading articles, watching videos, attending seminars, or working with a financial planner or coach. By investing in your financial education, you can set yourself up for long-term financial success.
Living below your means does not mean becoming a penny-pinching miser. It does mean being more aware of how you spend money, your existing debt, and your ability to handle unexpected problems. But it also means putting yourself in the best position to have what you need to enjoy your life fully.
Living Below Your Means FAQs
What does it mean to live below your means?
To live below your means refers to spending less money than you earn. This can be achieved by managing your expenses so that they are less than your income, or by increasing your income through employment or other means.
Living below your means allows you to save and invest money for the future, rather than constantly living paycheck to paycheck or relying on debt to cover expenses. It can also provide financial freedom and security, as you are not constantly worried about paying bills or meeting financial obligations.
To live below your means, you may need to make some changes to your lifestyle, mindset, and habits. This might include things like cutting back on unnecessary expenses, finding ways to save money on everyday expenses, investing, or starting a side hustle. It may also involve setting financial goals and creating a budget to help you manage your money more effectively.
How can I save money on everyday expenses?
There are many ways to save money on everyday expenses. Some ideas include buying in bulk to take advantage of discounts, shopping around for the best prices on everyday items, and using coupons or discounts whenever possible. You can also try to reduce your energy and water usage, which can help lower your utility bills.
How can I increase my income?
There are many ways to increase your income, including finding a higher paying job, starting a side business or freelance work, or investing in assets that generate passive income. You may also be able to negotiate a raise or promotion at your current job, or take on additional responsibilities for extra pay.
Do millionaires live below their means?
Millionaires generally live below their means to accumulate and preserve their wealth. This means that they are careful about how they spend their money and make sure not to overspend or take on unnecessary debts.
Many millionaires also have a strong focus on saving money and investing to grow their wealth over time. Some millionaires do live an extravagant lifestyle. However, it is much more common for them to be mindful of their spending and prioritize financial stability and security.