Living Below Your Means Should Always Be the Goal
There is a lot of information about what living within your means actually means. Living below your means is when you aren’t spending more money than you earn. You spend less or equal to the amount of money you make each month from your sources of income. Living below your means doesn’t mean that you aren’t able to spend money on things you love in order for you to enjoy your life. Instead, the goal is to create a more secure financial future with long term financial goals while still enjoying the fancy dinner out occasionally.
Why You Should Live Below Your Means?
There are a number of reasons why living below your means should be the goal.
Freedom: Once you have cash left over at the end of the month from your paycheck and you are living below your means, then you can actually start to experience some real freedom. You don’t have to stay in the office longer so you can pay for your car or mortgage. You can use your spare time and do something you enjoy doing. Many excuses about lack of time boil down to money.
Money can save you in time of need: If you are overspending and there is no cash saved up for emergencies then you are putting yourself in real trouble. Whether it’s the car breaking down or the heater in the middle of winter if you have lived above your means you are going to have trouble.
It’s good for your physical and mental health: Living below your means and having an emergency fund can really make a difference for your mental health. The fact of knowing that if you were to lose your source of income you wouldn’t have that many issues adjusting can give your anxious mind a break. It’s also helpful for your physical health because when you aren’t working all the long hours to make ends meet you have time to focus on exercise or hobbies, such as starting a new sport.
The associated satisfaction of saving: An underrated part about saving is the satisfaction that comes along with it. If you have ever found some cash in your winter coat you forgot about or a pair of jeans you haven’t worn in a while then you know this feeling. You will look back at your current self-living below your means and be grateful and satisfied with your current behaviors.
You can start expanding your means: Living below your means can seem like just accepting your income and circumstances and learning to live with them but this isn’t the case. Living below your means is actually the foundation for starting to go beyond your means and being able to afford some nice things. You can’t start to build wealth when there is nothing left at the end of the month to start building.
How to Live Below Your Means
There are a number of things you can do to live below your means.
Create a Budget
In order to stop living paycheck to paycheck and start living below your means, creating a budget is important. Goal based financial planning begins with a budget. If you don’t have a firm grasp on finances and the money going out and coming in, you could end up in a never-ending cycle of debt. Creating a budget can help you determine if you are living below or above your means. In order to determine how much money you make each month, consider your income and other sources of revenue. This can include money from side gigs, child support, or gifts. The next step is to calculate how much money you spend each month. This should include every single transaction, such as credit card payments, mortgage or rent payments, utilities, food, and your other monthly expenses.
Each month may be diffident so calculate for six to 12 months and find an average. Subtract monthly expenses from income. If you have money left over, this means you are living below your means. If you end up with a negative number, you need to make some adjustments.
Track Spending
Once you have created a budget, it’s useful to track spending at least for a few months to make sure you aren’t falling off track. In order to track your spending, create your own spreadsheet or use a budgeting app. Recording each purchase can be a good way to decide if it’s something you really need to buy. If you know you are tracking your spending, the $5 coffee may not be the best idea when you know you already have some at home.
It’s really important to track the small purchases as well as the large ones. You may find that you are spending a lot of money in small amounts over time without even thinking about it. These purchases add up quickly. When tracking your spending, it helps to categorize your spending into the mortgage, bills, and treats so you can better see what you are spending. The longer the period of your tracking, the better your conclusions will be since you will be able to eliminate some of the exceptions that come up in everyone’s budget from time to time.
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Use Tools to Your Advantage
There are a lot of apps and tools that will help you track your spending and create a budget. Not only can tools help you track your budget but there are tools that can help you get money back. Using cashback sites can help you get wiser about the purchases you do have to make. There are plenty of different sites that will reward you for purchases at different retailers, both offline and online, and you get a percentage of your purchases back. These sites work by having affiliate agreements with different retailers so when you make a purchase with them, the cashback site earns the reward and gives it back to you.
Don’t Rely on Your Credit Cards
Credit cards are okay and can allow you to make big purchases if you don’t have the money upfront. However, the key is that you need the ability to pay off those purchases. It’s recommended that you keep your credit utilization below 30%. If you have a credit limit of $10,000 then your spending should be below $3,000. If you do end up making more purchases on your credit card, it can show that you are in financial distress and it can negatively affect your credit score. Relying on credit cards can be a bad idea because your credit card company can close your credit card account or decrease your credit limit without any warning. If you are charging more than you are paying, you eventually run out of available credit.
Reduce Your Meaningless Spending
It’s easy to spend a lot of money and you aren’t alone, with the majority of Americans spending over 80% of their yearly income. If you want to live below your means, you need to cut back spending in some categories. Before you purchase something, ask if you really need it. By questioning each purchase, you can better understand your priorities and what you want to spend your money on. When you spend less than you make, you are able to pay off loans, save for big purchases, and get out of debt. Depending on your current situation, there can be a number of categories where you are spending too much. This mindless spending can be due to pressures to keep up with the Joneses. While you may be able to fake wealth for a little bit of time, you will end up paying for it later, especially as more interest is added to your credit card balance.
Memberships: Cancel your expensive entertainment, gym, and TV subscriptions, especially if you aren’t using them to their full advantage. If you want to keep some of these subscriptions then opt for some cheaper ones.
Cars: Buying a new car means that it can lose 20% of its value within a year. Buying a used car can save you money and still allow you to get where you need to go.
Drinks and Food: Instead of going out for lunch every day at the office, pack your lunch and cook at home. Going out can cost five times more than cooking at home.
Clothes: It’s great to stay up on the latest trends but do you really need new clothes? Spend less on clothes by shopping at thrift stores.
The process of eliminating unnecessary expenses can seem painful at first but it’s really an important step to live below your means. Not only do you want to reduce meaningless spending but you also want to make sure you aren’t spending too much on the things you do need.
Negotiate Bills and Rates
Many people think that the rates that banks or credit unions impose on their services are set in stone. However, many financial institutions want to keep you as a customer so learning how to negotiate rates can be helpful. To save money on credit card bills, ask your credit card company if you are eligible for a lower annual fee or interest rate. If you aren’t able to get a lower rate then consider a credit card balance transfer to help boost your finances. This allows you to pay off debts with a 0% interest rate. You can also negotiate bills for other services.
Pick Up a Second Form of Income
If you are hoping to live below your means then the second form of income can help you achieve this goal. If you work the standard 9-5 job, it may be hard to pick up a second shift without stretching yourself too thin. However, the gig economy is booming and there are different ways you can monetize your interests and hobbies. There are plenty of freelancing apps where you can put your talents to use. If you can’t find a second form of income, look for ways to maximize the income you already have. For example, if you usually get a tax refund, you may adjust your tax withholding so you get more money in your paycheck. Be sure that you are signed up for the right disability, health, and company benefits.
Downsize Your Home
Your home is likely taking up a lot of your income. If you have purchased the most expensive home that the bank said you could afford, it can be a struggle to keep up with the mortgage, insurance, and maintenance payments. Instead, you may want to downsize your home and choose a cheaper home to make it easier to live below your means. For example, having a dining room sounds nice but if you only use it once or twice a year, it may be worth it to find a home that is more affordable.
Build an Emergency Fund
Having savings that you dedicate to emergencies will prevent you from having to use your credit cards when there is a financial emergency. An emergency fund that has three to six months of living expenses is the ideal goal but just starting out with $200 to help with minor emergencies is a good start. Use your budget to determine how much you can save each month and then do it.
Save up for Purchases
Instead of putting purchases, you can't really afford on a credit card, save up for them. If you can’t afford to save up for a purchase then you can’t afford to buy it. To make saving easier, before you even get your paycheck be sure to transfer money automatically. Many employers and banks allow for automatic transfers and this will allow you to resist the urge to spend more than you need to.
Living Below Your Means and Debt
With so many loans and credit options, it’s easy to spend more than you earn. As a general rule of thumb, debt isn’t a good thing to have. There are times when debt is unavoidable and living below your means doesn’t necessarily mean that these times don’t exist. Instead, it means not taking on debt that is not strictly necessary. For example, a mortgage is a type of necessary debt for most people. Debt isn’t just about the amount you owe when you take out the loan but also the amount that you will owe over time because of interest so you need to approach with caution. If you are having trouble paying your bills, taking on more debt to get you out of financial trouble can be one of the worst things you can do.
Living below your means actually allows you to avoid further debt and start to eliminate the debt you may have already accumulated. Once you start paying off debt then you can start saving. And, when you decide to start saving, the best option is to open a savings account. We can help you with suggestions down below:
Build Savings by Living Below Your Means
One of the biggest benefits of living below your means is that it frees up some money so that you can save. Think about all the things you have wanted but haven’t been able to afford, such as a new car, home, or the next vacation. None of these things are possible without large sums of money. When you live below your means, you can afford the things that are really valuable to you instead of just what is in front of you. Take a second to think about all the things you can afford one day if you start to spend your money more wisely.
Retirement is a cost that you need to consider sooner rather than later. The longer you wait, the harder it is to save and the less you will be able to put away. Retirement is a financial necessity that most people will face so it makes sense to start preparing as soon as you can. When you live below your means, you are able to control your money both now and in the future, even after you have stopped working.
Continuing to Live Below Your Means
If you have completed the steps to live below your means then the key is to stick to the budget you have set up. Be careful about your future spending habits and work to continue to look at ways to save money by cutting unnecessary expenses and costs. Remember that if you don’t want to carefully track all your finances and write everything down, there are services to help you stay on budget. It’s important to look over finances regularly so that you know where you can improve and how well you are sticking to the plan.
Don’t let yourself be discouraged if you give into temptation and spend unwisely or make mistakes. Living below your means is a habit that does take time to strengthen and build. The most important thing you can do is to not give up on your budget and take small steps to improve your finances. With organization and discipline, it’s easy.
Final Thoughts
Living below your means comes with a number of different benefits. It’s not too difficult to live below your means but you do have to look at your finances, create a budget, and stay focused. Living below your means will allow you to pay off your debt and start saving for things that truly matter in life.