Living below your means can be simple to understand, but for many, difficult to do. At its surface, the concept is simply to spend less money than you make.
Take your income, add up your expenses, subtract the two, and as long as you come up with a positive number, you’re okay.
The problem is that many people aren’t doing anything to keep track of their expenses and have no idea if they really are living below their means or not. If they aren’t, they have no clue how to get to a point where they are.
What Does “Living Below Your Means” Mean?
Living below your means doesn’t have to mean that you are pinching every penny, clipping every coupon, and only buying things on sale. There is actually a lot more that goes into it.
The biggest change doesn’t involve spending or saving money at all. It’s really all about your mindset.
It means you take your finances seriously by keeping track of your spending, creating a budget, stopping trying to look wealthofgeeksthy, and actually start becoming wealthofgeeksthy. None of this is possible until you are truly spending less money than you’re making – simple as that.
Why You Should Live Below Your Means
The reason you need to live below your means is also very simple. If you are always spending more than you make, you’ll never really live the life you want to live because you won’t have the money to do so.
Living below your means will give you the ability to start paying off your debts, saving, investing, and even reach a point of financial independence.
How to Tell if You’re Spending Too Much
As mentioned earlier, many people don’t give a second thought to whether they are living with their means or not. If you’ve decided you’re ready to get your finances in order, here are 5 signs to look out for:
1. You Don’t Have An Emergency Fund
One of the most fundamental concepts for financial independence is having an emergency fund.
An emergency fund consists of four to six months of expenses in case you suddenly lose your source of income or large unforeseen expenses appear. Not having an emergency fund in case of injury, sickness, or loss of income is a tell-tale sign that you’re spending too much.
2. You Carry Credit Card Debt
I’m not saying using your credit card in general means you aren’t living below your means, but if you aren’t able to pay it off consistently month to month, then you might be spending too much.
Credit cards should really only be used for the points they offer and never have a higher balance than you can afford to completely pay off each and every month. If your credit card balance every month isn’t zero, you’ll need to cut back.
3. You’re Not Saving At All
You’d be amazed at how many high-income households have almost little or no net worth. If you aren’t saving any money month to month, you should take a closer look at your expenses.
4. You’re Not Investing
Investing is the best way to grow your money, either in the stock market or in alternative ways. If you don’t have enough cash left over each month to have a consistent contribution to a brokerage account then you are likely spending too much money.
5. You Struggle to Make End Meet
Not everyone has a six-figure job, but that’s not always an excuse for struggling to make ends meet. Many times it’s due to overspending, especially with higher-income families. If you have a hard time paying the bills and are living paycheck to paycheck every month, it’s time to figure out why.
How to Start Living Within Your Means
There are really only two ways to balance out your finances. Make more money or spend less. Preferably you could do a little of both.
For most of us, instantly increasing our income can be very difficult. The best route is to cut back expenses, as you have far more control over what you spend, and the results will be immediate.
1. Understand How Much You Make
Your very first step in being able to live within your means should be understanding how much money you actually make. That’s more than just knowing your salary. Take a look at all forms of income and figure out what the number is after any taxes.
2. Create a Financial Plan and Budget
An essential part of anyone’s finances is having a plan and a budget. Figure out what your financial goals are and make them quantifiable and specific. Don’t say that you simply want to save money. Put an exact figure on how much and then determine how you will achieve that goal.
Part of the plan should also be to create a budget. Take all the categories of your spending and limit yourself to a certain amount in each. Once you go over that amount, you can’t spend on that category anymore.
3. Track Your Spending
A plan and budget are no good if you don’t stick to it. If you have no idea how much you’ve spent on any given category you’ve set yourself, you’ll never achieve anything.
You don’t have to recreate the wheel either here. There are plenty of free tools out there that will help you keep track of everything, making it super easy to do.
4. Get Rid of Unnecessary Spending
Now that you’re tracking your expenses, figure out which expenses are unnecessary and which are essential living expenses.
For those of you that think “I have to have my daily Starbucks”, you might need to rethink that.
If you really want to get your finances in order, you’ll have to make sacrifices, and probably ones you don’t want to make. Unnecessary expenses add up very quickly, and cutting them out will make your road to financial independence much easier and shorter.
5. Consolidate and Pay Off Debt
Once you’ve gotten rid of those unnecessary expenses, you can take part or all of that money and put it toward the biggest destroyer of your budget: debt.
The first step of your debt payoff plan should be to lower your interest rates. If you have several loans, you can consolidate them into one loan with a lower interest rate. That alone could save you thousands of dollars in interest over the course of the loan.
After that, it’s all about putting as much as you can toward paying off your loans. Paying off all your debt (except your mortgage) will lift a huge financial weight off your shoulds and give you a great foundation for living below your means.
6. Stop Using Credit Cards
When spending money on your credit card, it’s easy to lose track of how much you’re spending. Its also been proven that it’s harder for us to make a purchase when we need to use cash. The physical action of handing someone our money is much harder than simply swiping a card.
Until you have your finances in order, stop using that card, and feel the pain of giving someone else your money. Hopefully, it makes you think twice about any purchases. Your credit card company won’t be happy, but your finances will be.
7. Save for Big Purchases
All of us will eventually need to make a big purchase. Some will come out of the blue (you have an emergency fund now right?), but most you’ll see coming a mile away.
Get ahead of these big purchases by saving for them long in advance. Instead of going more into debt, you’ll be able to have the big-ticket item you want or need and still be financially stable.
8. Negotiate Costs
Another great way to save money is to negotiate the costs of any services. Cell phones, cable, insurances, and many other services aren’t just going to hand you a discount, but you’d be surprised what they’d do if you just ask.
Don’t go in blindly, do some research on other services, and be informed. Remember, service providers what to keep your business even if it means at a discounted price.
9. Get a Second Income or Increase Your Current One
Ok, so you’ve done everything you can to cut back your expenses and make every penny count. Sometimes that’s still not enough to really get you back on track.
The second prong of attack on your finances would be to increase your income. Ask for a raise, get a second job, start working a side hustle, or start looking for a better-paying job. It will be worth it to get yourself back on track.
10. Change Your Mindset
Probably the most important aspect of living within your means is changing your mindset. Too many people have the “Keeping up with the Joneses” mindset and that only leads to financial ruin.
Once you let go of the need to drive up in a brand new car or live in the biggest house on the block, your life instantly becomes so much better. You can stop pretending to be something or someone you’re not and live the life you want to live.
The Benefits of Living Below Your Means
Once you’ve put in the time and effort to get your finances in order and have money left over at the end of each month, you can start to reap the benefits that come from living below your means.
You Can Start Investing
As mentioned before, investing is a great way to grow your money and achieve financial independence. Any money that’s not being allocated to an emergency fund or saving for a big purchase should be invested.
The power of compounding gain cannot be overstated, and future-you will be thanking past-you big time.
Your Life is Simpler and Less Stressful
Once you live within your means, your stress levels will plummet.
For one, your mindset will be in a much better place, no longer keeping up the facade of wealthofgeeksth. You’ll also have peace of mind that you don’t have to worry about money nearly as much as you used to or at all.
Maybe you haven’t reached financial freedom, but with the emergency fund and savings you have, you know you have a safety net that is worth its weight in gold.
You’ll be Healthier in General
You might also find that you are healthier overall, too.
Stress is a big factor, but you’ll likely notice that a lot of the unnecessary expenses you once had were not the best for your health either. Smoking, drinking, and junk food are just a few examples of expenses that can shorten your lifespan. Not only will they be out, but you’ll likely pick up healthier habits like walking instead of driving or eat better in general.
You Can be More Charitable
One of the best benefits of having some extra money month to month is helping those in need. Everybody needs some help and donating to charities is a great way to do your part.
There are tons of charities to choose from, so find one that means something to you and start giving. You don’t need to give hundreds or thousands of dollars; small contributions will go a long way for most charities too.
You’ll Be Content with What you Have
As mentioned earlier, changing your mindset is a huge part of getting your finances in order. Not keeping up with everyone else will let you be happy with who you are and what you have. It doesn’t get any better than that.
You Can Reach Financial Independence
Ok, I lied. It can get a little better than being content. Reaching financial independence will allow you to not only be happy with what you have but allow you to pursue other interests and passions without having to worry about the money aspect of life. This won’t happen overnight, but the long road certainly seems worth it.
Living within your means is an essential foundation not only when it comes to achieving financial freedom but for simply being happy.
Too many of us are more concerned with looking wealthofgeeksthy than actually doing what it takes to be wealthofgeeksthy. Getting your finances in order will provide so many more benefits than any fancy car or house ever could.
Hopefully, the strategies I’ve listed out will help get you started on your journey to financial independence.
Jeff is a fan of all things finance. When he's not out there changing the world with his blog, you can find him on a run, at a Mets game, or just playing around with his kids. If you haven't already checked out his site, start here: HYDMS