If you are tired of living paycheck to paycheck or going into debt to pay your bills, it’s time to start learning how to live below your means. Living below your means is not just about saving money or cutting expenses down. By consistently spending less than what you make, you can take control of your finances and put yourself on a path towards financial freedom.
When your income exceeds your expenses, you give yourself the power to handle unexpected expenses, save for retirement, and create the life you want, whether that’s traveling the world, starting your own business, or spending more time with family and friends.
Here are our best tips for living below your means and reaching financial independence.
- If you are looking for financial security, living below your means is a great way to help you get there.
- Some indicators that signal that you are living above your means include persistent credit card debt, lack of an emergency fund or savings, and excessive spending.
- We will outline eight tips to help you live below your means, from creating a budget to spending more intentionally to developing a money mindset.
The Importance of Living Below Your Means
Simply put, living below your means is when you have money left over at the end of every month, and you are not living paycheck to paycheck or going into debt to fund your daily expenses. In other words, you are not spending every dollar you make. That is important because the money you spend now will not go towards building your net worth, whether that’s saving and investing or paying down debt.
When we think about living below our means, the first things that may come to mind are frugality and being cheap. But, that is not the case at all! It’s about making conscious financial decisions and balancing our present and future.
As you start evaluating your current lifestyle, think about your priorities, including your short-term and long-term financial goals. To create a more stable financial future, that does not necessarily mean you should deprive yourself of things you genuinely enjoy. Instead, align your financial habits to help you achieve financial freedom.
Effects of Living Above Your Means
Regularly spending more money than you have is costly and creates financial chaos.
If you are living above your means, chances are you are probably paying high-interest rates on credit cards or overspending on housing costs or transportation costs. Just because you get approved for a new car or a mortgage slightly out of your budget does not mean you should take on all that debt and the risks that come with taking on more debt than you can reasonably handle.
For example, if you are in the market for a new house, you need to consider any unexpected expenses that might come up, such as your appliances breaking or your pipes getting damaged. A recent New York Times article highlights some of the challenges that come with being house poor or purchasing a home that strains your finances.
4 Tell-Tale Signs You are Spending Too Much Money
If you always feel like you do not have enough money, chances are you are living above your means. Below are a few indicators you should be aware of:
1. Lack of an Emergency Fund
As the name implies, an emergency fund is cash you save for unexpected expenses, such as a medical bill or a lost job. The rule of thumb is to have at least 3-6 months of your essential living expenses set aside in a savings account. Due to market uncertainty and a looming recession, lately I’ve been holding 8+ months of cash in a high-yield savings account as a precaution.
If you do not have a solid emergency fund, you are not alone. According to a 2018 study by the Fed, one-third of Americans would be in a difficult financial situation if they had an unexpected expense of $400. If you fall under this camp, saving money may seem out of reach, but you can always start with as little as $20 and build from there.
2. Credit Card Debt
If you have been using credit cards to fund your current lifestyle, you have probably felt the sting of long-term credit card debt through high APRs. If you can only afford to pay the minimum payment every month, it may end up taking years to pay off your balance and cost more than what you initially owed. Generally, you should pay off your balance in full every billing cycle to avoid paying excessive interest and racking up debt.
3. Lack of Savings
If you are currently spending every dollar you earn, consider saving at least 10% of your income every time you get paid. For example, if you make $1,000 every two weeks, set aside at least $100 every paycheck. Eventually, you will build up a sizeable emergency fund and have the capital to start investing, which is the key to building wealth.
4. Constantly Purchasing Big-ticket Items
If you struggle with impulse purchases, such as upgrading your phone every year, following the latest fashion trends, or making last-minute vacation plans, you are probably living above your means. The easiest way to throw yourself into financial chaos is to spend without thinking and push yourself into debt.
8 Ways to Live Below Your Means
With the right money mindset and tools, you can quickly learn to live below your means and put yourself on the path toward financial freedom. It’s all about being intentional with your spending and making thoughtful financial decisions.
1. Create a Budget
You likely have a pretty good idea of how much money you are making. But, how much you think you are spending versus how much you are actually spending can be very different. Creating a budget and tracking your monthly expenses will help you get a more accurate picture of your financial situation.
When calculating how much you make a month, consider all sources of revenue aside from your day job, such as side hustles, child support, tax refunds, etc. Then, calculate how much you spend each month and bucket them into needs or wants, including everything from rent or mortgage payments to groceries to student loans. Each month may vary, so take a few months’ worth of expenses and average them out.
When you find these two numbers (needs vs wants), subtract your average monthly expenses from your income. If your number is positive, then you are living below or within your means. If your number is negative, you may need to make a few adjustments.
Once you have a clear understanding of your spending habits, you will have a foundation for creating a budget. Think of your budget as a roadmap to achieve your financial goals rather than as a form of punishment. By creating a realistic budget, you can ensure that you pay your bills on time and spend your money wisely.
Popular budgeting systems include the 50/30/20 rule, zero-based budgeting, and value-proposition budgeting. You can use a spreadsheet or a budgeting app like Mint or Personal Capital. As long as you review your budget regularly and stick to it, the tools you use do not matter as much.
Every month, I track my spending on Mint and categorize my expenses down to the dollar on a custom spreadsheet. Doing this helps me compare my spending month to month and gives me a better idea of which areas I may be overspending on.
2. Create a Financial Plan
Once you have a budget, it’s time to create a solid financial plan. Everyone’s financial planning process will be different. But, common components include your financial goals, a debt repayment plan, an emergency fund, and an investment plan.
Think of short-term, medium-term, and long-term goals you want to achieve. For example, your short-term goal for the first three months could be sticking to your budget, while your goal for the next year could be saving and investing at least 10% of your income. Longer-term goals could include saving for retirement or a home down payment.
If you have a lot of high-interest debt, that should be one of the first things on your list to tackle. Carrying a balance can prevent you from reaching your other goals, not to mention the debt can snowball and threaten your financial stability. If you are currently carrying balances on multiple credit cards, consider consolidating your debt to 0% APR cards to save money on interest. Note that there may be transfer fees if you take this route.
3. Cut Down Unnecessary Expenses
You can save a lot of money by curbing your spending and cutting down on things like expensive coffee, trendy clothes, Michelin star restaurants, fancy cars, etc. Eliminating costs you do not care as much about gives you the freedom to spend on things you genuinely enjoy.
As you start tracking your budget, think about areas where you can cut spending, such as:
- Dining out, including restaurants and takeout
- Services, such as manicures, lawn maintenance, cleaners, etc.
- Unused memberships and subscriptions
- Impulse purchases, such as online purchases, lottery tickets, junk food, etc.
- ATM fees, bank fees
You do not need to get rid of all discretionary spending or mull over every single dollar you spend. That would be completely unreasonable. Instead, reflect on your priorities and goals through your spending habits.
For example, I used to go shopping a lot and buy new clothes and shoes whenever I was bored. But, since the pandemic, I’ve found that these impulse purchases were not making me happier and were one of the main culprits preventing me from saving money. I have also learned a lot about the negative repercussions of fast fashion and no longer want to support that, so now I only buy what I need. By doing this, I have freed up a lot of my capital to save and invest more toward a home down payment and retirement.
Whenever you want to buy something, ask yourself if you need it. Whenever I shop online, I put things into a cart and then leave them there for a few days. That way, I give myself time to think through what I need and remove items I don’t actually need or abandon the cart completely.
4. Spend Intentionally
Tying into cutting expenses, aim to spend money more intentionally. Try writing down what you value in life and then checking your spending habits to see if they match what you wrote down. I value experiences over material things, so I am more likely to dine out at restaurants, grab boba, or go to the movies every week versus going shopping.
Part of the process of determining your needs versus wants includes finding ways to spend less. For example, consider purchasing preowned items at thrift stores, using coupons, buying groceries in bulk, downsizing your apartment or house, or buying a used car.
When you hold back on things that cause you to struggle to keep up with your bills, you open up opportunities to create a healthy financial life and not feel stretched by the costs of your living expenses. So, before you buy that brand-new car or the most expensive home your bank approved you for, think carefully about whether it’s worth it to put yourself in more debt.
5. Pay Yourself First
If you struggle to save money, make it a priority to save and invest a percentage of your paychecks from your monthly income. If you do not prioritize saving and investing early on, it’s easy for other things to get in the way. For example, a friend may invite you to a last-minute concert. You may take a spontaneous vacation getaway. Your car suddenly breaks down, and you need to repair it.
If it seems like life is always getting in the way of you living below your means, automate your finances to ensure you pay yourself first and make the process as painless as possible. At my previous company, I automatically invested 10% of my paychecks each pay period into my 401(k). That way, I saved for retirement with minimal effort.
You can also automate utility bills, credit card payments, and other investments. Doing so ensures your bills will get paid on time, and you will be less likely to spend money since it’s not all going into your checking account. If you have a tight budget, even investing a few dollars a week will help you grow your net worth over time and allow you to reap the benefits of long-term investing.
6. Negotiate Rates and Bills
When we think of our interest rates and bills, we often think they are non-negotiable, but that is not the case. From the perspective of financial institutions and service providers, they want to keep retention rates high, so they will be open to negotiating with existing customers.
In the past, I have called AT&T’s customer support about my home internet bill and was able to renegotiate to a lower price after a price hike. Because they were willing to work with me, I still use their services today years later.
To save money on a credit card bill, for example, ask your credit card company if you are eligible for things like a lower interest rate, annual fee, or a long-term repayment plan. If they refuse to negotiate with you, consider a credit card balance transfer to a 0% APR credit card.
7. Increase Your Income
Spending less money and living frugally will only take you so far. At some point, you will not be able to cut any more expenses without compromising your quality of life. That’s where increasing your income comes into play. When you maximize your take-home pay, you will have more money to reach financial freedom.
Some options to consider include:
- Negotiating a higher salary,
- Getting a second job,
- Finding a higher paying job,
- Dividend investing,
- Starting a side hustle, or
Since the pandemic, millions of Americans have quit their jobs in search of change, with job security and better pay as top concerns. Dubbed “The Great Resignation,” now is one of the rare instances where it’s an employees’ market. In other words, if you feel that you are underpaid or deserve a promotion, do not be afraid to ask for what you deserve and potentially walk away if the negotiations go poorly.
Additionally, with the rise of the gig economy and freelancing apps, there are plenty of places where you can put your talent to good use to make extra money. For example, you can spend a few hours a week driving for Uber or Lyft or delivering food for DoorDash or GrubHub. You can do tasks for other people through TaskRabbit or monetize any skills you have on Fiverr or Upwork.
8. Improve Your Money Mindset
This may sound cliche, but reaching financial independence is all about perspective. Instead of seeing living below your means as making sacrifices or restricting your lifestyle, think of this as an opportunity to focus on your long-term vision and build the life you want.
Learning how to save and invest the past few years has helped me think much bigger in terms of my financial and career goals. Since going down the rabbit hole that is personal finance, I have learned a lot about saving for retirement, different investment options, alternative income streams, and ways to increase my net worth outside of the traditional 9-5 job.
As you explore ways to live below your means, it’s perfectly okay to make mistakes and try things out. The key is to keep learning and building healthy financial habits.
The Bottom Line
Living below your means takes time and patience. It may seem difficult at first, especially if you are prone to impulse purchases or eating out every day. However, with the eight tips we have laid out, you will have a good shot at achieving your financial goals, whether that’s tackling credit card debt, saving for a home down payment, paying for a vacation getaway, or simply paying your bills on time.