You often hear money pundits talk about how you must “live below your means” to have financial success. While living below your means isn’t the only key to reaching your money goals, it is certainly a critical component.
But what does it mean to live below your means? Is it possible to live within your means without feeling deprived?
The following paragraphs will discuss what it means to live below your means, why it’s important, and our top 7 tips to live below your means successfully.
What Does It Mean to Live Below Your Means?
Put simply, to live below your means is to spend less than you earn.
In other words, whatever your level of income, your lifestyle, and the money you spend maintaining it don’t exceed that income.
For example, let’s say your yearly income is $50,000, but your yearly expenses are only $40,000. In this case, you’re living below your means.
However, living below your means isn’t just a matter of ensuring your expenses are lower than your income. It’s also important to make sure that you’re not bogging yourself down with liabilities and debts, even if you can mathematically afford all the monthly payments.
Thus, living below your means also entails not relying on debt to maintain your lifestyle. If you have a monthly income of $5,000, but you also have two $500 car payments, a $2,500 mortgage, and maxed out credit cards, there’s going to be little left over to pay for necessities. You’re also going to be hard-pressed to save any money or invest.
This isn’t to say that all debt is bad or that some debt isn’t necessary to further your life. However, debt is a tool that should be used as needed and not simply to gather more possessions or increasingly expensive possessions.
Thus, to live below your means is to spend commiserate with your income without reliance on debt to maintain your lifestyle.
Why it is Important to Live Below Your Means
Living below your means is important for several reasons.
First, living below your means is the main avenue for people to become independently wealthy or otherwise reach a stage of financial independence (FI). If you’re able to live on significantly less than you earn, you’ll be able to allocate more funds to saving, investing, and pursuing other opportunities.
But aside from pursuing financial independence, living below your means is also critical for people not on the path to FI. Those who fund their lifestyle with debt rely on every ounce of income to meet their liabilities and are one unexpected event away from financial disaster. All it takes is losing a job or a medical emergency to put you in a position where you cannot meet your monthly expenses.
Thus, it’s important to live below your means to buffer yourself from unexpected events through healthy savings and the ability to reallocate monthly funds if need be.
7 Tips to Successfully Live Below Your Means
Living below your means sounds simple, but the reality may be more complicated, especially if you’ve already dug yourself a bit of a hole.
No matter where you are in your finances or the state of your finances, you can use the following tips to start moving toward a more secure financial future.
Budgeting is going to be a big key to living below your means, especially in the beginning. If you don’t know what money is coming in and going out or where it’s going, then you’ll have a hard time determining if you’re spending within your means or where to make adjustments.
The good news about budgeting is that there is no one-size-fits-all approach. There is a myriad of different budgeting methods available depending on your preference and style. Pick a method that works for you, and be diligent about figuring out where you stand.
Once you’ve built your budget and tracked your expenses for a few months, see if there are areas where you could cut back or reallocate funds to other money goals. Ensure you have all relevant budget categories accounted for, including a little something for saving and investing.
2. Build an Emergency Fund
If you don’t already have an emergency fund, that should be the first thing you focus on once you’ve built a budget.
One of the main reasons people experience financial hardship is because they lack sufficient funds to deal with an unexpected event, such as income loss. If you must rely on credit to deal with a broken appliance or to stay afloat for a few months following job loss, then you need an emergency fund.
An emergency fund is money set aside for unexpected expenses outside your typical monthly expenses. Most recommend having at least 3-6 months’ worth of expenses in your emergency fund. This way, you’ll be able to cover your expenses for several months, allowing you time to get back on your feet and hopefully avoid going into debt or getting behind on bills.
Start small and make it a goal to put away $1,000 in a savings account. Once you’ve hit that goal, shoot for 3 months’ worth of expenses, and eventually, 6 months.
Once you have a healthy emergency fund, you can begin focusing on other aspects of your financial life without worrying that an unexpected event will undo all your hard work.
3. Avoid Debt
As previously mentioned, overreliance on debt to fund your lifestyle is not living within your means, even if you can meet all your monthly obligations with your income on paper.
In truth, having too many liabilities is like being perched on the edge of a cliff. A small gust of wind might be your undoing.
If you have a lot of debt, work to pay it down, especially high-interest consumer debt like credit cards. Other types of debt, like mortgages and auto loans, may be unavoidable, but that doesn’t mean you should push yourself to the limit. Just because you qualify for a car payment of $500 a month doesn’t mean you should weigh yourself down with it. Instead, look for more reasonable options that don’t max out your spending power.
One way to ensure you’re not overstretching yourself is to be aware of your debt-to-income ratio and the recommended ratios for your situation.
Your debt-to-income ratio is a measure of how much of your income is going toward debt. Lenders typically prefer to see your total debt-to-income ratio at no more than about 36%, and no more than 28% of that should be going toward your mortgage or housing.
While the above numbers are a good guideline, keeping your debt-to-income ratio even lower is a great way to ensure you live below your means.
4. Reevaluate Your Spending
What do you spend your money on? Hopefully, building a budget has given you an idea of where your money is going, but it’s also important to evaluate your spending habits and see what changes you can make.
Do you like to have the latest gear or brand-name items? Do you like to buy new items regularly? Are material possessions and your image important to you?
If you answered yes to any of the above, then you may want to reevaluate your spending. Now, don’t get me wrong, if material possessions and having new/expensive items is important to you, so be it. But it’s important to be aware of your preferences, the driving force behind them, and how those preferences impact your finances.
You won’t live below your means if you’re going for the champagne lifestyle on a beer budget.
If living below your means is important to you, you must reevaluate your spending and bring it more in line with the realities of your income.
Plus, most people can’t even tell the difference between designer brands and cheaper knockoffs or a brand-new car versus a couple-year-old used car.
What’s more, most won’t care.
5. Plan for Big-Ticket Items
If you’ve got all of the above covered, another way to help you live below your means is to plan for big-ticket items.
While you have the basics covered with your emergency fund, there are other necessary and desired expenses you can begin planning for. Planning for expenses you know you’ll have eventually helps you avoid accruing more debt and ensures your emergency fund is intact for true emergencies.
I’m speaking of the big-ticket items include cars, home repairs, travel expenses, and any other expenses you know will be coming up. If you know you’ll need to replace something in the next few years, why not start planning and saving ahead of time?
The average lifespan of a car is about 12 years or 200,000 miles, you’ll need a new roof every 20-30 years, and the average cost of a vacation is $4,500 for a family of four or $1,145 per person.
These are not small amounts of money, and the better you’re prepared for them, the better off your financial situation will be.
6. Avoid Lifestyle Creep
Even if you currently live below your means, many have been undone by lifestyle creep as they’ve increased their income over the years.
And it makes sense. As your income increases, you’re increasingly able to afford more and better things, and many cannot resist the urge to spend commiserate with their income.
That, in a nutshell, is lifestyle creep. As your income creeps up, so does your lifestyle.
Some amount of lifestyle creep isn’t necessarily a bad thing. As you increase your income and become more successful, it’s natural to indulge more. However, many take it too far and can’t resist the urge to indulge. This is also why most lottery winners go broke within 3-5 years.
It’s okay to spend some of your hard-earned money on desires but remember what helped you reach that level of success and try not to deviate from the habits you developed at a lower income level.
Continue to live below your means even as you increase your income.
7. Shift Your Mindset
For many, living below your means will require a shift in mindset. We already talked about reevaluating your spending, but shifting your mindset is a global approach to your life that will allow you to live below your means and strive for loftier financial goals.
What is important to you? The reality is, what you deem to be important will have a huge impact on your lifestyle, your finances, and your happiness.
If you feel you need the latest items, designer brands, the biggest house, or a fancy car, then unless you make a ton of money, you’ll likely always be striving for that next thing, and you may be disappointed with the reality of your situation.
Part of living below your means and improving your financial situation, especially if you have more meager means, is being contented with what you have, being content with being frugal, and really zeroing in on what matters the most.
Is it that fancy car with a big payment or financial freedom?
What does it mean to live below your means?
It’s about spending less than you earn, but it’s also about not relying on debt to fund your lifestyle. But above all, it’s about working to secure financial freedom for you and your family.
Shift your mindset and make living below your means a goal, then get started achieving it.