What does it mean to live below your means?
Living below your means implies you spend less than you make. Many people live below their means on purpose so they can save money.
The money saved may be for a larger future purchase or for retirement. Living below your means is not meant to deprive you. Ideally, you’re living below your means but within your needs. This means you have extra money left over at the end of the month to save, but your lifestyle and standard of living haven’t been significantly changed.
Another way to think about it is you’re not going without the essentials, but choosing to not spend on the non-essential so you can save and establish some financial security.
What does it mean to live within your means?
Living within your means implies you spend nearly all you make, but nothing more. So while you’re not going into debt, you are not saving much either. An example of living within your means is living paycheck to paycheck.
Reasons to live below your means
One of the biggest reasons to live below your means is saving for something important to you. It may be for something long term like retirement. Or a downpayment on a house. Or your child’s college fund.
If you don’t have something in mind to save for, living below your means can still be important. Why is it important to live within your means? Because spending just to spend is not only wasteful, but it also is unfulfilling.
Benefits of living below your means:
- You can spend on the things that mean the most to you, and stop spending money on the things that don’t
- Overall happier that you don’t have the weight of financial stress on your shoulders
- Peace of mind that you have an emergency fund in case anything goes wrong
- No longer worried about paying bills
- Motivated to save for things that matter to you
- Excited to give back and donate to those who are less fortunate
- Flexibility to have fun and do what you want and have the money to do so
Do you need to start living below your means?
Below, find a list of common signs you may benefit by living below your means:
- You are stressed about your finances
- You feel broke all the time
- You don’t have an emergency fund and have no plans for one
- Your credit card balances are not paid off each month
- You spend more than 25-30% of your monthly income on your mortgage or rent
- You don’t have any savings for future purchases or items you know you’ll need (like a car, kids’ college, etc.)
How much below your means should you live?
The answer to this question will vary for everyone and is quite personal. It is a combination of your earnings and spending (or what spending you are willing to give up).
To begin living below your means, you need to know your financial situation. Starting with how much you make. If you’re salaried this is probably straight forward.
But maybe you have fluctuating income or income that is not the same each pay period or month. Do a quick calculation of what you typically make every month and aim to live on less than that each month.
Make a budget/create a plan for your money
To live below your means and spend less than you make, you need to have a plan. Without a budget, you have no way of knowing how your spending is trending for the month. By creating a budget you can have a roadmap and plan for how you will spend less than you make.
If you’re not sure where to start, I like to use a simple spreadsheet. The first column contains every category I spend in a month: mortgage, gas, food/grocery, cable, heat, electric, etc. Then, next to each I put in the dollar amount I spend on that item each month.
The goal would be to add up all of your expenses and have them be less than what you take in. If the total is equal to or greater, the goal is to reduce categories you can to become less than you earn.
Check out how to create a zero-based budget for more tips.
Now that you know how much money you bring in, and have a plan for your money, you’re ready to start taking action! Check out financial ideas to live below your means!
1. Spend less money than you make (might be easier said than done)
This may be straight forward but to live below your means, you need to spend less than you make. Sticking to the budget you just created above should help you do this.
If you aren’t able to stick to your budget, identify some of the reasons why and adjust your budget. What can you cut and not notice?
A great free tool to help you keep track of spending each month and how you fare month over month is Personal Capital.
2. Pay yourself first
The saying goes do not save what is left over after spending, spend what is left over after saving. This is so true if you have financial goals you want to accomplish.
An example of paying yourself first is having money automatically transferred from your checking account into a savings account on each payday. You don’t have an opportunity to spend the money because it doesn’t even reach your checking account!
Another way of paying yourself first is by participating in the 401K of your employer. In this example, again, money is taken out of your paycheck and deposited into a retirement account before you have a chance to spend it.
By paying yourself first and automatically having the money transferred from your checking account to another savings account is a great way to live below your means.
3. Don’t rely on credit cards
If you aren’t careful, it can be really easy to over-extend yourself and live above your means using credit cards. It’s so convenient to whip out your card and swipe for any purchases.
But if you don’t keep tabs on these purchases, you may spend more than you make and go into debt.
Use credit cards sparingly and don’t rely on them if you want to live below your means. Try to adopt a cash-only lifestyle to ensure you can live below your means.
4. Don’t try to “keep up” with anyone
Why do we do this to ourselves? Why do we see something that someone else has and want it when we were perfectly comfortable with what we had before we saw them with it.
Practice gratitude for what you have, and remind yourself that most of the things you spend money on are wants and not needs. Stopping yourself from that purchase you don’t need now and save the money will reap huge benefits later.
5. Live off one income
Living off of one income is a great challenge for two-income households. Challenge yourself to live off of one income, and save the rest. Not only will you be ahead financially, but you’ll be conditioned into some pretty great financial habits.
For example, budgeting and not impulse buying if you lose your job or one of you decides to become a stay at home parent.
6. Save for purchases (try setting up sinking funds)
Make a point to save money for all known or expected expenses every month. This can be everything from knowing your insurance is due in 5 months, to wanting a new sweater because it’s getting cold to your child’s baseball camp this summer.
Whatever expenses you know you have coming up, start saving for them now.
Create a sinking fund, which I call a “spending savings” account. I’m saving now for something I know I will be spending in the future. Sinking funds work well for things like gifts: holidays and birthdays throughout the year.
Monthly or quarterly recurring expenses like gym memberships, Netflix, cable, internet, etc. You know these expenses are coming, so don’t let your checking account run to zero before you have paid for them.
Saving or allocating money for purchases now will help you live below your means.
7. Cut meaningless expenses
I like this tip and it’s personal for everyone. I’m not saying cut the morning latte. What I am saying is cut the morning latte if making coffee at home is just as good to you, but getting a manicure is what’s important to you.
I’m suggesting you make a trade-off with where you spend money, and choose to spend money on the things that truly matter to you.
In fact, make a list. That may help guide you on purchases big and small. Get a piece of paper and make two columns.
One column will be for you to list spending that is important to you, makes you feel good and you want to be able to keep doing. These are things that add value to your life and would remove value if you could no longer have them.
The other column is impulsive spending. Spending that is out of habit but you know doesn’t benefit you in the long run. YOu may spend money here out of habit. You may want to get rid of them but you wouldn’t miss them once they are gone.
The goal is to spend on the things that are truly valuable to you and stop spending on the things that aren’t. So it’s not about the daily coffee.
If you can’t live without it and know you won’t make it at home, then buy it on the road. But there are other areas you spend where I’m sure you could find a way to cut back. Check out ways to stop impulse purchases here.
8. Establish an emergency fund
The peace of mind that comes with having money stashed away for an emergency is worth the sacrifice it’ll take to get there. Live below your means for as long as it takes to establish a proper emergency fund.
Life happens, and when unexpected expenses arise that you can’t pay for, that can be stressful. Living below your means now to save an emergency fund is well worth the effort.
9. Boost your income
If all else fails and you simply cannot live below your means to find money to fund an emergency fund, consider finding another source of income. That may mean a second job, seasonal employment, a side hustle, selling things, etc.
If you are committed to a goal of living below your means and can’t find a way to do so with your current income, then find a way to make more. You can do it!
If you want to try living below your means, I say go for it! Challenge yourself! You’ll not only start saving more money more quickly, but you may find you enjoy everything that comes with spending less: less stuff, less stress, and more freedom!
Do you live below your means? Why or why not?