Living below your means is a must for your overall financial health. It’s key to all aspect of your finances, from managing your money and your budget, to living a stress-free and happy life. Read on to learn how.
Have you ever thought about the term living below your means? It’s a term that you hear every now and then, but what does it really mean?
The simple definition of living below your means is basically spending less money than you make. Sounds easy enough, doesn’t it?
Living Within Your Means
I’m sure that you’ve also heard the term “living within your means. Maybe you think that they’re basically the same thing, right?
Both those terms have similar meanings, but are really quite different at the same time. If you’re living within your means, then you’re just making ends meet every month or week. In other words, you’re living from paycheck to paycheck.
Yes, maybe you earn enough money to pay your bills, put food on your table, and afford basic necessities. And that’s a good thing considering that Americans are piling on debt faster than the economy is growing, but it isn’t enough.
Why You Need to Start Living Below Your Means
When you live below your means, you’re more financially secure. You have money to spare after all your expenses are paid.
This is how you’ll be able to save money for emergencies, contribute to a retirement account, and pay for other things that you want without getting into debt.
You will gain so much more out of life when you’re living below your means. You will be gaining financial freedom.
You’ll have the freedom to…
Be happier, healthier and stress-free.
Have the security of an emergency fund
Not be bothered or worried by debt collectors.
You’ll never have to worry about paying your bills.
You can pursue a career that will make you happy.
You will have the peace of mind in being able to save for retirement.
You can save up for things that will make you happy.
Your relationships will be better because you’ll have less to worry about.
You’ll have the luxury of doing what you want because you’re no longer financially strapped.
You can start building wealth instead of giving your money away month after month.
And so much more!
Sound good? Great! Let’s get started.
Setting Financial Goals
The first thing that you should do is think about your financial goals for your future. What do you want to accomplish in life that money is holding you back from doing?
Do you want to buy your first home? Maybe you would love to change your career, but need to stay where you are because of the financial security. How about being able to retire comfortably or having the freedom to travel.
Figure out your WHY. Why do you want to change your financial situation? What will you gain by living below your means?
It’s much easier to make changes in our lives, financial or otherwise if we have a clear picture of why we are making that change.
Create a Budget
Living below your means, requires you to have a plan in place for your money, which is your budget.
Many people just don’t like to budget. I get that, I don’t really like to do it either, but I know that I have to. Finally, committing to budgeting is what helped me get out of debt and achieve financial freedom.
Having a budget will help you control your money instead of letting it control you. Your budget will help you control unnecessary spending, and allow to save money.
How a budget will help you start living below your means
You know that you need a budget, but how is that going to help you start living below your means? Well, your budget is a starting point. It’s your plan on where your money is going and it’s also a tool that you’ll need to begin living below your means.
Once you’ve drafted your first budget, you need to assess where you’re at. Do you earn enough at this point to make ends meet every month?
If you do, that’s great, you’re able to live within your means. Now, you’ll need to cut costs so you can start living below our means.
If you cannot cover all your expenses with your current income, then you are living above your means. You’ll have a bit more work to do, but don’t worry, I can help you out with that.
What kind of spender are you?
The next step is to determine why you can’t live below your means. There are actually only two reasons why.
You’re either wasteful in spending money or because your monthly expenses exceed your income.
If you’re just a wasteful spender, then living below your means should come a little easier for you with a few tweaks to your budget and your attitude towards money.
There’s two things that a wasteful spender needs to get under control to achieve financial security. First of all, you need to change your mindset about money.
Secondly, you need to reduce your frivolous spending. This should be pretty easy to do once you change your attitude towards money.
We’ll get into more detail on how to change these in a bit.
Basic expenses exceed your income
If you’re not wastefully spending your money and doing your best to make ends meet, but your expenses exceed your income, then you have a bit more work to do.
You are going to have to reduce your monthly expenses so you ar able to balance your budget.
How to begin living below your means
Whatever goals you have for your financial future, there are a few things that you must have in place before you start to work towards your goals.
You need to make sure that you are financially secure and able to begin living below your means. By this, I mean that you must have the basics covered before you an work on your bigger financial goals.
You need to…
Change your money mindset
Build an emergency savings fund
Get out of debt
Reduce your expenses
Change your money mindset
One of the biggest changes that you need to make is changing your money mindset. You nee to start valuing money for what it’s worth.
Many of us are wasteful with our money without even realizing it. How many times have you said to yourself, “it’s only $20, it’s no big deal” when you’re buying something that you really don’t need.
How about “the cable bill just went up again, oh well, there’s nothing that I can do about it.”?
The truth is that it’s not only $20. If you say “it’s only $20 once a week, that adds up to over $1,000 a year.
And guess what? You can actually do something about your cable bill going up. You can shop around for a better deal. You can call your current company and ask for a better price. How about giving up altogether and finding cheaper alternatives to watching TV.
Changing your mindset about money starts with controlling where your money goes. Starting today, think about every single thing that you spend your money on. Ask yourself these questions:
Do I really need this?
Is it worth the cost?
Does it make sense to spend or waste money on this?
Can I save money by doing something different?
Is there a cheaper alternative?
What am I getting out of it?
Am I really getting my money’s worth from this?
Is there anything that I can do differently so I don’t have to spend this money?
Is this really worth risking my financial future over?
Once you start being more mindful of where your money goes and what you’re spending it on, you’ll begin to realize how much money is being wasted.
Build an emergency savings
Once you’ve got a better handle on controlling your money, the next thing you must do is build an emergency fund.
Your emergency fund is your financial safety net. It’s what going to help you continue to live below your means if an unexpected expense arises.
Your emergency fund will also prevent you from getting into debt or further into debt. You’ll have the savings to pay for those emergencies without having to charge it on your credit card or take out a loan.
The goal is to build a savings of at least $1,000. That amount should cove most small emergencies such as a car repair, appliance replacement, or dental bill.
Once you have saved $1,000, don’t stop contributing to the fund, you should contribute to it on a weekly or monthly basis. After all, that $1,000 will only be able to cover a minor expense. But what about a bigger financial emergency, like your heating system dying in the middle of winter or an emergency room visit.
These types of emergencies can really put you in a precarious financial position if you don’t have health insurance or home warranty insurance.
Grow your emergency savings
When setting money aside for emergencies, you should keep those funds in a separate savings account; preferably in an account that you don’t do regular business with such as an online bank. This will help prevent you from dipping into your savings or non-emergencies.
You should also shop around for a bank that’ll grow your money faster for you, so look for a bank that offers a high interest rate.
Get out of debt
Debt is one of the biggest reasons why many people live paycheck to paycheck. If you want to live below your means, you have to pay off your debt. You need to stop giving your money away to credit card companies and banks.
You must stop using credit to fund your lifestyle or pay for things that you simply cannot afford. If you can’t afford something that you want, then do without it until you have saved the money for it.
Many people also use credit to pay for things that are needs, such as paying to get their car repaired. After all, you need your car to get to work and pay the bills, right?
I get that, we can’t lose a job because we refuse to use credit to pay for a repair. This is why having emergency savings is so important. When you use credit to pay for these things, you are literally flushing money down the toilet.
The real cost of debt
Take for example a $500 car repair bill, if you put that on credit and just make the minimum payments, you’ll probably end up paying close to $1000 in principal and interest when all is said and done.
Yes, you’ll end up paying almost double the original amount by using credit recklessly. This is something that you really need to think about before whipping out your credit card.
Let me give you an example…
On one of my credit card bills, I had a balance of a little below $3,000 with a minimum payment of $70.
On the back of the bill, it stated that by paying only the minimum payment every month, it would take 14 years to pay off. YIKES…Not only that, I would end up paying over $6,000 in the end. That’s 50% more in interest alone.
It also stated that if I paid $108 per month instead of the $70 minimum payment, it would cut the repayment of this debt down to 3 years instead of 14 years.
So, by paying about 54% more, just $38 per month more on this card, I would finish paying it off 11 years faster. I’m pretty surer that if you knew just $38 a month could help pay off a debt 11 years sooner, you would be able to find it in your budget, right?
Create a debt repayment plan
Now that you know how much your debt is actually costing you, I’m sure that you agree that you need to pay it off as fast as possible. It’s really a necessity if you really want to start living below your means.
Once you have an emergency savings fund of $1,000 built up, the next thing that you need to focus on is getting rid of debt. I’ll walk you through all the steps needed to help you get out of debt in this post "How to Get Out of Debt Even When You're Broke."
So we covered building an emergency fund and getting out of debt. I know that this is a lot of information to take in and a lot of work to do.
Maybe you’re starting to feel a bit overwhelmed. You may be thinking, “how can I build an emergency fund or get out of debt when I’m living from paycheck to paycheck?”
Well, simply put, you have to start reducing your expenses to free up money to get it done. Reducing expenses isn’t as difficult as many people may think it is, but it does mean you nee to be mindful of where your money is going.
Luckily, you’ve been working on changing your mindset about money and you’re committed to budgeting since that’s where it all starts.
Finding the gaps in your budget
The best resource to help you know where to begin reducing your expenses is your budget. You need to review your budget to find ways to cut back.
The first thing that you should concentrate on is your discretionary spending, which is anything that you spend your money on that aren’t necessities.
Think in terms of non-essential expenses, anything that isn’t a necessity, such as…
These types of expenses are the easiest to cut back on by thinking outside the box and finding free alternatives.
Reducing flexible expenses
Next, you should take a look at how much you spend on other flexible expenses. Think of ways of how you can reduce the amount that you spend on these items.
Take your grocery budget for instance. Of course, you can’t cut food out of your budget. Yet, there are many ways that you can reduce how much you spend.
You can meal plan, shop sales, use coupons and money-saving apps, find budget friendly recipes to reduce the expense, and the list goes on.
You should check out “How I Cut Our Grocery Bill in Half” where I talk about everything that I did to reduce my grocery budget by 50%.
Another way to save money without feeling deprived is finding cheaper alternatives for things that you spend your money on daily.
Take your work week lunches, bring your own lunch could save you at least $50 to $75 a week.
What about your specialty coffee every morning. If you’re not willing to give it up, why not find a way to enjoy it without paying the high price.
You can make those same delicious drinks at home for much less. This could easily save you about $40 or more every week.
Just think about it, making these two small changes can help most people save an average of $90 every week. That’s $4680 a year!
Finding cheaper alternatives is one of my favorite ways to save money without feeling deprived. I share many more tips that could easily save you hundreds of dollars each month in this post.
Fixed monthly expenses
Lastly, there are your fixed monthly expenses which include things like your mortgage and utilities.
These are things that you must pay month after month and typically seen as non-negotiable expenses. But, that’s not always the case.
Take your mortgage, for instance, many people see this as an expense that can’t be reduced and just have to live with.
But, there are some things that you can do to offset this expense, such as renting out a room or downgrading to a less expensive home.
You can also try reducing your interest rate to lower payments. Shop around for a better interest rate or even refinance with your current lender to a better rate if your credit score has improved in recent years.
Heating costs are another expense that can be difficult to reduce since the cost of fuel is market driven. This means that many fuel suppliers follow the same pricing structure, so shopping around to save an extra two cents a gallon wouldn’t make a huge impact on your finances.
Nevertheless, there are some things that you can do to reduce this expense. There are cheaper alternatives that you should consider, such as installing an energy-efficient heat pump or transitioning to heating with wood pellets.
Doing these things does require an upfront investment, but can save you a lot of money in the long run.
Fixed expenses are more difficult to lower, but with some research and planning, and possibly an upfront investment, they can be reduced significantly.
Phew, that was a lot of information and may take you some time to implement everything. You should bookmark or pin it to come back to for a refresher as you go through this transition.
You can’t do everything here all at once without getting a little overwhelmed, so just implement a few tips at a time until you master them. Once you have, add in a few others and before you know it, you’ll be living below your means.
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