Nonstop releases of the newest electronic devices, clothes, makeup, and more make it challenging to resist spending money. Unfortunately, studies show that the average credit card debt in the U.S. per household was $6,270 in 2021. Nevertheless, living beyond your means is one of the most effective ways to get out of credit card debt and take control of your finances. So, let’s dive into what it means to live below your means, how to get started, and its many benefits.
To live below your means signifies spending less than you earn. Therefore, if you spend less or equal to the amount you make, you are living below your means. Conversely, if you live above your means, you may be splurging and incurring debt or struggling to save.
By living on less than you make, you give yourself the opportunity to reach financial freedom. Reducing your spending or increasing your income allows you to cover your living expenses, avoid debt, handle emergencies, and build wealth over time.
Living below your means allows you to reach financial freedom by making conscious financial decisions, such as budgeting, cutting back on unnecessary expenses, and building savings. Here are nine tips to start living below your means to create a more stable financial future:
Your budget acts as your roadmap for reaching your financial goals. It ensures you pay 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. 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.
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:
In the end, it doesn’t matter which budgeting method you choose. What matters is finding the way that works best for you, review 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. You can track your spending by creating a spreadsheet or using a budgeting app.
After tracking your expenses, understand your priorities and reduce spending that doesn’t align with them. For instance, consider cutting back your spending on expensive gym memberships, subscriptions, dining out, clothes, or electronics.
Force yourself to save around 20% of your income and transfer the amount to your savings or investment account, such as a 401(k) or Roth IRA. Also, consider automating your finances to avoid the temptation to spend a portion of your paycheck. Check this blog about money-saving tips from an expert.
Sometimes you may find that you have reached a point where no cuts are possible, and your current income isn’t enough to live beneath your means. Therefore, increasing your income, such as negotiating a raise, finding a second job, or freelancing, is necessary. 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.
Resist the temptation to purchase the most expensive house the bank says you can afford. Instead, choose a smaller home in a neighborhood that is more affordable or a smaller fixer-upper that requires a few inexpensive improvements. This way, you won’t struggle to keep up with insurance, mortgage, and maintenance payments. What matters is being surrounded by the people you love to turn the house into a home.
Credit cards can be very attractive. They have many perks such as cashback rewards, miles points, and the opportunity to build credit. However, you will be creating new debt and financial distress if you misuse them. Therefore, only put purchases on your credit card that you can pay off in full at the end of the month. When trying to live below your means, your best bet is to use credit cards during emergencies when you have exhausted all other resources.
Building an emergency fund will keep you from resorting to credit cards when faced with a financial emergency. Ideally, your emergency fund must 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.
Ask your credit card company if you are eligible for a lower interest rate, annual fee, or a long-term repayment plan. If you have good credit, the chances are that you may qualify for a credit card balance transfer and pay off your debt with 0% interest for 12 months. However, watch out for credit card balance transfer fees and APR. Nonetheless, the costs are usually lower than the interest rate on your credit card, which may help you pay less interest and save more money in the long run. You could also consider debt consolidation to save on interest.
If you are still struggling to live below your means, consider the following benefits to motivate you in achieving financial freedom:
Living below your means lowers your stress levels because you are not worried about money each month. Every purchase requires thought and intentionality. Therefore, you won’t lay awake at night wondering where your money went or stress over the length of time between now and your next paycheck to afford your living and periodic expenses.
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.
Living below your means sets you on the right track to start building wealth. To build wealth, you need to have money to invest. To have money, you need to spend less than you make. For example, you could invest in a retirement account or a regular investment account. However, remember that you will be penalized for early withdrawal from most retirement accounts, whereas you can cash out your money without restrictions by investing in a regular brokerage account.
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 gives you the opportunity to take control of your money, handle unexpected expenses, help you grow your finances and net worth. Even though the transition may seem challenging and lengthy, it will be worth every effort you put into in the end. By following these nine 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.