It was 2008, and I was a single, 22-year-old, fully employed guy living my best life in NYC. It was the 16th of the month and I had another big spending weekend with friends. Dinner with friends, followed by some drinks at B bar, and then I booked my flights for the upcoming bachelor party. I still had two weeks before I get paid but I knew my bank account was close to E. So what did I do? I reluctantly went online to check my bank account and give the balance a look through- $100 dollars left! How is that possible? How is that supposed to last 10+ more days? I still have to pay for my cable!
I went through that cycle of spending money, dread, and shame for four years only to leave a six-figure job with $16k in student loan debt and no substantial savings. At that point, I had to face the music. I was living above my means. I had terrible savings habits and didn't know how I was going to start making any progress on my financial goals.
That's when I knew that figuring out how to live below my means was the first step on my journey to wealth and financial freedom.
Key Summary:
In this article, I'll walk through:
- What it means to live below your means and why it's important and
- A quiz I created to help you determine if you're monthly expenses < your monthly income.
- The steps I took to start living below my means.
So, let's get after it!
What Does It Mean To Live Below Your Means?
Living below your means simply means spending less money than you earn. It doesn't mean that you have to live like a college student or deprive yourself of the things you enjoy. It's about being mindful of your spending and finding ways to live a fulfilling life while keeping your expenses lower than your income.
Let me be clear. Living below your means is not the same as living a frugal lifestyle, although the two can be closely related. Frugality is about being economical with your spending and finding ways to save more money wherever possible. Living below your means is about keeping your spending within your means, so you can grow your retirement savings and invest for your FI/RE goals.
Living below your means can look different for everyone, depending on your specific personal finances- income, expenses, and lifestyle. For some people, it might mean cutting back on dining out, entertainment, or unnecessary expenses so that they can start saving money. For others, it might mean moving to a lower-cost-of-living city (LCOL). The key is to find ways to reduce your expenses so you can increase your savings to secure a stable financial future.
Quiz: Are You Living Below Your Means?
Take this quiz to see if you're already living below your means. If you can check off 2 or more, you are likely living below your means.
- You pay off your credit card every month
- You transfer money to your savings and sinking fund monthly
- You're contributing to retirement accounts
- You're paying off more than the minimum payments on your debt
Why Should You Live Below Your Means?
Living below your means is crucial for your financial security for a few reasons.
- Firstly, it allows you to save money and invest some of your monthly income so you can accelerate your path to financial freedom. The two biggest inputs in figuring out how long it'll take you to become financially independent are your savings rate and your monthly spending. Keeping those two in check is the first step to financial independence.
- Secondly, living below your means can reduce stress, anxiety, and shame when it comes to managing your money. In these moments, it may feel like you're alone but most of us struggle with money shame, and stress when it comes to living paycheck to paycheck. In fact, due to inflation and the rising costs of goods, today, 62% of people are still living paycheck to paycheck. So you're not alone.
How To Live Below Your Means
Now that you understand what living below your means is, the importance of it, and if you're spending less than you earn today; here are the action steps I took to start living below my means:
1. Track your expenses
I started by tracking my expenses for three months to see where my money was going. This was an eye-opener for me but once I dug into how I was spending money, I knew exactly what needed to be cut to avoid credit card debt, start building an emergency fund and start aligning my spending habits with my values.
2. Create a sustainable budget
Once you know where your money is going, create a budget that reflects your financial goals and future financially independent vision for your life.
3. Find your enough number
Usually, when people start budgeting they cut their expenses across the board. But the problem with that strategy is that you don't align the spending to what brings you value and joy which then leads to going over your budget monthly because you're not feeling fulfilled. I encourage folks to try to find their enough number for each of their spending categories.
This was a concept I discovered in Vicki Robin's “Your Money, Your Life” . The concept of the "Enough Number" is all about determining how much money you need to live the life you want.
When budgeting, I like to break this down by spending category and work on finding my “enough number” for all of my different categories.
- What’s a big enough house?
- What’s a nice enough car?
- What’s enough eating out?
This journey to finding my enough number took me years and is constantly evolving but the pursuit has gotten me closer to feeling more fulfilled with how I spend my $$.
By focusing on your Enough Number, you can free yourself from the constant pressure to earn and spend more, and find peace of mind in knowing that you have enough money to live your most optimistic life
4. Cut your spending in places that don't bring you joy:
After you start finding your enough number in certain categories, start to cut some of the spend that doesn't bring you joy or value. When you cut, you can do two things:
Reallocate that spending to your savings goals in order to increase your savings rate.
Shift those dollars to other expense categories where you haven't quite reached your enough number. When I went through this exercise, I shifted some of my monthly spending from eating out to travel. That extra money to travel, increased the joy in my daily life without me feeling deprived or like I sacrificed something.
5. Build up one month in an emergency savings fund:
It's imperative to exit the vicious cycle where you spend money, run out of income, go into credit card debt, pay off what you can, then start all over again when you get your next payday. The emergency savings fund is the first step for that. So open a savings account and save up one month of savings in that account. Then, when unexpected expenses come up like your heat going out, you have the funds to pay for it and can avoid the credit card debt.
6. Eliminate Credit Card Debt:
Paying off your CC debt will be one of the biggest wins on your journey to financial success. When it comes to paying off CC debt, focus on the highest interest rate debt first and knock off each one.
However, only make the minimum payments until you've built up 1 month of expenses in an emergency fund. Once you have that, you can start to get laser-focused on paying off all CC debt.
Key Takeaways:
Living below your means is a powerful tool for achieving financial independence . By spending less money than you earn, you can save for emergencies, invest in your future, and reduce stress and anxiety around money.
Remember, living below your means is not about depriving yourself of the things you enjoy, but about being mindful of your spending and finding ways to live a fulfilling life within your means. Use the tips and strategies outlined above to start living below your means today and achieve financial independence sooner.
