How to Start Living Below Your Means
Living below your means is a skill lost on many of us. In fact, a report from the New York Federal Reserve shows that the national average card debt among cardholders was $6,864 in the last quarter of 2023.
Still, there is a way to turn it all around. Living below your means is one of the most effective ways to get out of credit card debt and take control of your finances.
What Does It Mean to Live Below Your Means?
Living below your means is all about spending less than you earn. If you spend less or equal to the amount you make, your net earnings outweigh your expenses. On the other hand, if you live above your means, the money you bring in is not enough to cover your expenses, and that’s when your debt grows.
Obviously, it’s better to make more than you spend. But how do you do it? Here are 10 practical strategies.
10 Tips to Help You Live Below Your Means
These tips will help you get ahold of your finances and start spending less than you earn.
1. Create a Detailed Budget
Your budget acts as your roadmap for reaching your financial goals. It helps keep you mindful of your bills and spend money according to your priorities. To create a budget, you need to have a firm grasp of your finances and the amount of money you earn and spend.
Here’s a step-by-step breakdown of how to create a budget:
- Determine Your Income - Figure out how much money you make after taxes, and be sure to factor in all forms of income, whether it be your bi-weekly paycheck or passive income on the side.
- Calculate Your Monthly Expenses - Find out which of your expenses are fixed (like a monthly gym membership) and which are variable (dining out, grocery shopping). After calculating your income and expenses, subtract your monthly fees from your monthly income. If there is leftover money, you are living within your means. If the number is negative, you might be living beyond your means and need to adjust your spending habits.
- Choose a Budgeting Style - Once you have a good understanding of how much money you spend every month, you will have a foundation for creating a realistic budget that works for you. There are several budgeting techniques; however, there is no one way that works for everyone. Here are some popular budgeting methods:
- Cash Envelope System: The cash envelope system involves putting specific amounts of cash into different envelopes for specific purposes. You may use the money in each envelope until it is gone by the end of the month. For example, you can allocate $500 in the envelope designated for groceries, $300 in a separate envelope for transportation, and so on.
- Zero-Based Budgeting: Zero-based budgeting aims to have your income and expenses equal to zero at the end of the month. For example, if you earn $5,000 per month, everything you spend, save, or invest should add up to $5,000.
- 50/30/20 Method: The 50/30/20 method involves setting aside 50% of your income for necessities, such as housing, food, transportation, and utility bills. 30% of your income goes towards your wants, such as shopping and dining out, and the remaining 20% is for your savings.
In the end, it doesn’t matter which budgeting method you choose. What matters is finding the one that works best for you, reviewing it regularly, and, most importantly, sticking to it.
Once you have created a budget, consider tracking your spending to reach your goals.
Recording each purchase forces you to think twice before making a purchase to evaluate whether this is a sound decision. It will also help you understand your monthly expenses and identify areas you can cut or reduce.
Budgeting apps can also help you track your expenses to ensure you are not spending outside of your means. Apps such as Rocket Money, YNAB, and Goodbudget are effective in helping you organize your finances and track where exactly your money is going. Seeing all your expenses at once can also make it easier to address them.
To further reduce wasteful spending, tracking can also highlight subscriptions or recurring fees that may no longer be required. Those charges can add up and leave a significant dent in your wallet.
3. Cut Down Unnecessary Expenses
After tracking your expenses, it can be a lot easier to reduce spending.
As you track your purchases, ask yourself, “Do I really need this?” Questioning each purchase can help you better understand your priorities and identify what’s worth spending money on.
Depending on your interests, here are some areas you can reduce spending:
- Memberships: Consider discontinuing monthly subscriptions and memberships you rarely use. A good rule of thumb is to cancel anything you haven’t used more than once in the last month or two.
- Cars: Buying used vehicles can save you money while still getting you from Point A to Point B.
- Food: Instead of going out for lunch and dinner, pack a lunch and cook at home.
- Clothes: Spend less on clothes by shopping at secondhand stores.
4. Set Financial Goals for Future Success
We know how difficult it can be to cut expenses. Often, this means doing without something important. One way to make the burden a little easier is to always remember why you are doing it.
Start by identifying where you want to be in five years. Maybe you dream of escaping from credit card debt and having enough saved up for a down payment on a house. Goals like these will help keep you motivated.
It can also help to share these goals with other people. Having a financial coach can keep you accountable. They can also help cheer you on.
Seek out free resources in your area. For instance, your local community center may offer financial literacy programs and coaching sessions.
The National Foundation for Credit Counseling (NFCC) also provides access to certified credit counselors. The program has been operating since 1951 and has over 1,200 counselors ready to help.
Commit to saving around 20% of your income and transfer the amount to your savings or investment account, such as a 401(k) or Roth IRA. Consider automating your finances to eliminate the temptation of spending part of your paycheck.
Another great financial practice is putting money away in a savings account. This will come in handy in case of any rainy days or emergencies in the future. It may be a good idea to open a dedicated savings account that you will only touch when you need to make a big purchase or find yourself in a financial crisis.
Sometimes, you may find that you have reached a point where all your expenses are mandatory and cannot be avoided. If your current income isn’t enough to live beneath your means, then you may need to discover additional income streams.
Solutions may include increasing your income by negotiating a raise, finding a second job, or freelancing.
There are dozens of freelancing opportunities where you can capitalize on your hobbies and skills. For example, if you have a car, you could make more money by signing up for Uber or Lyft. Or, if you are an accountant, you could provide professional tax services.
Your mortgage or rent payments likely represent your largest regular expense. Reducing this cost will have a great effect on your finances. While it may seem like a big change, choosing a smaller home in a more affordable neighborhood may make a significant difference in your ability to save money. Another idea for losing less money from your house is reducing your sewer and water bills.
8. Decrease Your Credit Card Usage
Credit cards can have perks like cashback rewards, miles points, and the opportunity to build credit. However, every swipe of the card can create new debt and financial distress.
A good rule of thumb is to only put purchases on your credit card that you can pay off in full at the end of the month.
If an emergency expense does occur, a credit card can be a cheaper option than taking out a short-term loan.
9. Establish a Robust Emergency Fund
Building an emergency fund will keep you from resorting to credit cards when faced with a financial emergency. Ideally, your emergency fund should have three to six months of living expenses.
Use your budget to figure out what you can afford to dedicate to your savings and set up an automatic transfer. It may take time to save a couple of months’ worth of living expenses, but any amount you put aside is better than nothing.
What are some of the best practices for building and maintaining an emergency reserve?
- Automate Savings: set up automatic withdrawals from your checking to your savings account.
- Create a Separate Savings Account: keep your emergency funds separate from your day-to-day spending account.
- Live Under Your Means: limit the amount of spending you do and be mindful of frivolous purchases.
- Monitor Your Budget: regularly monitor your cash flow and make changes when necessary to add to your savings.
By following these guidelines, you can prepare yourself for a financial emergency should it arise in the future.
10. Aggressively Pay Down Debt
Everyone owes money, whether it be through student loans, a mortgage, or credit cards. If you want to pay it off quickly, consider these methods:
- Pay off the loans with the highest interest amounts first – this is called the “debt avalanche method.”
- Conversely, pay off the smallest principles as fast as possible – this is called “debt snowballing.” Throughout the avalanche and snowballing methods, you continue to pay the minimum balance on all bills.
- Consolidate everything you owe into one account - debt consolidation rolls everything into one monthly payment at a lower interest rate. It can make it more manageable, as you have one payment a month versus several.
Here are some additional reasons to improve your financial health.
Better Financial Decisions
A mindset of living below your means fosters greater financial awareness and more thoughtful spending and investment decisions. By consistently spending less than you earn, you become acutely aware of your financial habits.
This intentional approach to money management ensures that your spending aligns with your priorities, leading to more deliberate and meaningful purchases.
Additionally, having more savings enables you to make informed and strategic investment choices, focusing on long-term growth.
Improved Financial Flexibility
Having fewer expenses and more savings offers significant financial flexibility, enabling you to make life choices without being constrained by financial limitations.
For instance, a substantial savings cushion allows you to pursue career changes or further education without immediate financial pressure, providing the freedom to follow your passions and professional goals.
Similarly, having savings available for starting a business reduces reliance on loans, allowing you to invest in your entrepreneurial dreams. Overall, financial flexibility empowers you to make choices based on personal aspirations, leading to a more fulfilling and stress-free life.
Enhanced Financial Security
Living below your means provides financial security because you don’t have to wonder if you can afford to pay your bills on time. In addition, you will have peace of mind knowing that you can cover emergencies like a surprise medical expense.
Building Wealth
Living below your means sets you on the right track to start building wealth. To build wealth, you need to have money to invest and to have money, you need to spend less than you make.
Debt Reduction
Living below your means forces you to spend less than you earn and buy things you can pay for in full. Consequently, you don’t need to take on credit card debt or personal loans. Typically, these financial products come with high APR rates that can plunge individuals into more debt than they originally started with.
Setting up a financial plan and living below your means can set you up for financial success and give you the opportunity to take control of your money. Even though the transition may seem challenging and lengthy, it will be worth it in the end. By following these ten tips, you will have the chance to climb out of debt, afford your monthly expenses, and begin saving and investing money to reach financial freedom.
FAQ
What Does It Mean to Live Below Your Means?
Living below your means involves spending less than you earn, prioritizing essential expenses, and saving the surplus. This practice helps build financial stability, allowing for savings and investments that secure your future.
What Is the 50-30-20 Rule?
The 50/30/20 rule is a budgeting guideline where 50% of your income goes to necessities (housing, utilities, groceries), 30% to discretionary spending (entertainment, dining out), and 20% to savings and debt repayment. This rule helps balance spending and savings effectively.
What Is Living Beyond Your Means?
Living beyond your means occurs when your expenditures exceed your income, often leading to debt accumulation. This can result from overspending on non-essential items, not budgeting, or failing to save, ultimately jeopardizing financial health.
How Can I Start Living Below My Means if I’m Currently Living Paycheck to Paycheck?
To start living below your means, begin by creating a budget to track your income and expenses. Identify and cut unnecessary costs, prioritize paying off high-interest debt, and automate savings. Consider finding additional income sources or reducing large expenses like housing or transportation.
Is It Possible to Live Below Your Means and Still Enjoy Life?
Yes, it is possible to live below your means and still enjoy life. Focus on low-cost or free activities, set realistic spending limits for discretionary expenses, and find joy in simple pleasures. Being mindful of your spending can lead to greater financial security and reduce stress, enhancing overall life satisfaction.
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