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If you want financial security in your life, then you need to start living below your means. It’s an essential part of getting out of debt and building wealth and achieving financial freedom.
If you are not living below your means, you are probably in debt or on the verge of getting into debt. You can’t go through life spending more than you make and not get into debt. There is just no way around it.
On the other hand, if you are living below your means, you’ll be able to build wealth and have the financial security to live the life you want to live. Yes, you can get rich by living below your means!
Definition of Living Below Your Means
The simple definition of living below your means is basically, spending less money than you make. Sounds easy enough doesn’t it?
It’s a pretty easy concept to grasp but it is there is a fine line between living below your means and living within your means. Let’s take a look at the differences.
Living Within Your Means vs Living Below Your Means
I’m sure you’ve also heard the term “living within your means”. Maybe you think that they are basically the same thing. Right?
Both those terms have a similar meaning but are really very different at the same time. If you are living within your means then you are just making ends meet every month or week. In other words, you are living from paycheck to paycheck.
Yes, maybe you earn enough money to pay your bills, put food on the table, and afford the basic necessities. That’s a good thing considering that Americans are piling on debt faster than the economy is growing but it isn’t enough.
On the other hand, if you are living below your means, you have greater financial security. You are not broke at the end of the week waiting for your next payday. You’ll have an emergency fund available if you need it.
You have the ability to save for major purchases instead of using credit to pay for them and are able to pay your credit card bills in full every month.
How to tell if you need to start to living below your means
You can’t pay your credit card balances in full every month
You don’t have an emergency fund in place
Your mortgage or rent is more than 25% of your income
You spend more than 50% of your income on essential living expenses
You don’t have any savings for future major purchases that you know you’ll need
Benefits of Living Below Your Means
So why is it important to live below your means? Well, because living below your means is the secret to financial health. When living below your means, you are more financially secure. You have money to spare after all expenses are paid.
This is how you can save money for emergencies, can 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 living below your means. You will be gaining Financial Freedom.
You’ll have the freedom to…
- Be happier and healthier due to less financial stress
- Have the security of an emergency fund.
- Eliminate debt
- You can pursue a career that will make you really happy.
- Have the peace of mind in being able to save for retirement.
- Have better relationships because you will have less to worry about.
- You can save up for things that will make you happy.
- Have less financial hardships.
- Plan for the future without money worries.
- Never having to worry about getting the bills paid.
- You’ll have the luxury of doing what you want because you are no longer financially strapped.
- Start building wealth instead of giving your money away month after month.
- And soooo much MORE!!!
Sound good? Great! Let’s get started.
Quick tips to live below your means
Know how much you make
Understanding your take-home pay is pretty easy for most of us. But if you work on commission, or do shift work where you have an irregular schedule, it could get a little complicated. Using the lowest paycheck you typically bring in as a baseline is best when you are in this situation.
Spend less than you bring in
If you spend more then you bring in, you need to find a way to reduce essential expenses in addition to reducing your discretionary spending. Track your spending to see where you can cut back on spending.
Increase your income
When you’ve done all you can to reduce spending and still can’t make ends meet, you need to consider increasing your income to close the financial gap.
Stop trying to keep up with the Joneses
Stop trying to impress people or worrying about what they think about you. Don’t waste your money on things that you think will make other people happy. Do what is best for you, after all, you’re the one stuck with the bill when buying things just to impress others.
Save for purchases instead of using credit
If you can’t buy things without using credit, then you shouldn’t be buying them in the first place. Instead of using credit, save for the things that you want and need.
Build an emergency fund
Financial emergencies happen all the time, if you aren’t prepared for them by having an emergency fund, you’ll get into debt when they do happen. The easiest way to build an emergency fund is by treating it like any other expense that you need to pay every month.
Develop a frugal lifestyle
The definition of frugality, according to Wikipedia is being sparing, thrifty, prudent or economical in the consumption of resources such as food, time or money. By living a frugal lifestyle, you’ll be much more likely to live below your means.
Let’s take a deeper dive into how to start living below your means.
Living Below Your Means – A Complete Guide
Setting Financial Goals
The first thing 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 careers but need to stay where you are at because of 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 be gaining by living below your mean?
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. A plan 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 I have to. Finally surrendering to budgeting is what helped me to get out of debt and gain achieve financial freedom.
Your budget is how you are going to control your money instead of letting your money control you. Your budget is going to help you control spending money unnecessarily, and allow you to save money.
You can read How to Create a Fail-Proof Budget to walk you through creating a budget that works for you that you can live with.
Organize your finances…Take control of your money…Then get on with your life
Budget to living below your means
You know 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 the tool you’ll need to begin living below your means.
Once you have drafted your first budget, you need to assess where you are at. Do you earn enough at this point to make ends meet every month?
If you do that’s great, you are able to live within your means. Now you’ll need to cut costs so you start living below your means.
If you can not 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’ve got you covered.
What kind of spender are you?
The next step you need to do is determine why you can not live below your means. There are really only two reasons why.
You are either wasteful spending money or because your monthly expenses exceed your income.
If you are just a wasteful spender, then living below your means should come a little easier for you with a few tweaks to your money attitude and budget.
There are two things a wasteful spender needs to get under control to achieve financial security. First of all, you need to change your money mindset.
Secondly, you need to reduce your frivolous spending. This should come pretty easily 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 are not wastefully spending 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 are able to balance your budget.
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How to begin living below your means
Whatever your goals are for your financial future; there are a few things that you must have in place before you start working towards your goals.
You need to make sure 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 can work on your bigger financial goals.
You need to…
- Change your money mindset
- Build an emergency fund
- Get out of debt
- Reduce expenses
Change your money mindset
One of the biggest changes you need to make is changing your money mindset. You need 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 buying something we don’t really need.
How about “our cable bill just went up again, oh well, not much we can do about that.”?
The truth is that it is not only $20 If you say “it’s only $20” just once a week, that adds up to over $1000 a year.
And guess what? You actually can do something about your cable bill going up. You could shop around for a better deal. How about calling your current company and ask for a better price. How about giving up cable altogether and finding cheaper alternatives to watching TV?
Changing your money mindset starts with you controlling where your money goes. Starting today, think about every single thing you spend money on. Ask yourself these questions
- Do I really need this?
- Is it worth the cost?
- Does it make sense to be spending or wasting money on this?
- Can I save money by doing something different?
- Is there a cheaper alternative?
- What am I getting out of this?
- 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 is going and what it’s being spent on, you’ll start to realize how much money is being wasted.
Build an emergency fund
Once you’ve gotten a handle on controlling your money, the next thing you must do is build an emergency fund.
Your emergency savings is your financial safety net. It’s what’s going to help you continue to live below your means should an unexpected expense arise.
Your emergency fund is also what’s going to prevent you from getting into debt or further into debt. You’ll have the means 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 $1000, which the minimum amount that you should have saved. That amount should cover most small emergencies like a car repair, appliance replacements, or dentist bill.
Once you have $1000 don’t stop contributing, you should continue to contribute to it on a weekly or monthly basis.
After all, that $1000 will only get you so far should a minor expense come up. But what about a bigger financial emergency like your heating system dying in the middle of the winter or an emergency room visit.
These types of emergencies can really throw your finances into a tailspin if you don’t have health insurance or home warranty insurance.
Growing your emergency savings
When setting money aside for emergencies, you want to keep those funds in a separate savings account; preferably in an account that you do not do regular business with such as an online bank. This will prevent you from dipping into your savings for 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. This is the one I use simply because it offers the highest interest rate and it’s safe and convenient.
Cit Bank is the best option and my recommendation.
- Currently, they pay 2.25% APY through their savings builder account.
- Have no opening or maintenance fees.
- Compound interest daily to maximize your earning potential.
- Only require a $100 minimum deposit to open an account.
Get out of debt
Debt is one of the biggest reasons why many of us live from paycheck to paycheck. If you want to live below your means, you must 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 can’t afford. If you can’t afford something you want, then do without until you’ve saved the money for it.
Many people use credit to pay for things that are needs, such as paying for a car repair. 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 help with the cost of repair. This is why having an emergency saving 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 instance a $500 car repair bill, if you put that on credit and only pay 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 pay almost double the original amount by using credit recklessly. This is something you really need to think about before whipping out your credit card.
Let me show you an example…
Below is a snippet of a credit card bill; this card had a balance a little below $3000 with a minimum payment of $70.
Notice that by paying only the minimum payment every month, it will take 14 years to pay off? YIKES… Not only that, you will end up paying over $6000 in the end. That’s 50% more in interest alone.
You may have also noticed that if you pay $108 per month instead of the $70 minimum payment, it’ll cut the repayment of this debt down to 3 years instead of 14 years.
So, by paying about 54% more, just $38/mth more on this card you’ll kick it to the curb 11 years faster….What?? I’m pretty sure that if you knew a misly $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 costing you, I’m sure 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 fund of $1000 built up, the next thing you need to concentrate on is getting rid of debt.
So we’ve covered building an emergency savings account, and getting out of debt. I know that there is a lot of information to take in and a lot of work to do.
Maybe you are 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 must start to reduce your expenses to free up money to get it done. Reducing expenses is not as difficult as many people think it is, but it does mean that you need to be mindful of where your money is going.
Luckily you’ve been working on changing your money mindset and you are committed to budgeting because that’s where it all starts.
Finding the gaps in your budget
Your 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 you should concentrate on is your discretionary spending which would be anything you spend money on that aren’t necessities.
Think in terms of non-essential expenses, anything that is not a necessity such as….
- Steaming services
These types of expenses are the easiest to reduce by thinking outside the box and finding free alternatives.
Reducing flexible expenses
Next, take a look at how much you spend on other flexible expenses. Think of ways you can reduce the amount 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 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.
Another way to save money without feeling deprived is finding cheaper alternatives for things you spend money on daily.
Take your workweek lunches, brown bagging your lunch could save you at least $50 to $75 a week.
What about our specialty coffee addiction. If you are unwilling to give it up, why not find a way to enjoy it without paying the high price. You can make all those delicious drinks at home for a bunch less.
Just think about it, these two small changes have the potential to save most people an average of $90 every week. That’s $4680 a year!
Fixed monthly expenses
Lastly, there are your fixed monthly expenses which would include things like your mortgage and utilities.
These are things that you must pay for month after month and typically seen as non-negotiables expenses. But that is 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.
There are some things you can do to offset the expense such as rent out a room or downgrade to a less expensive home.
What about reducing your interest rate to lower payments. You can 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 area 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 won’t make a huge impact on your finances.
Nevertheless, there are some things you can do to reduce this expense. There are cheaper alternatives 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 ton of money in the long run.
We transitioned to pellets about 12 1/2 years ago and although it was a $3500 investment, it saves us over $1600 a year in heating costs. So far this investment has saved us over $20,000 and counting.
Fixed expenses are more difficult to lower but with some planning and possibly an upfront investment, they can be reduced significantly.
Phew, that’s a lot of information and may take some time to implement everything. 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.
Now is the time to do this, so make it happen! Don’t wait any longer, get to work now and create the worry-free life you want!
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