There are many misconceptions about what living within your means actually means. Simply put, to live below your means, you must not spend more money than you earn. So, if you spend less or equal to the amount of money you make each month from your job and other sources of income, you’re below your means.
Living below your means does not mean you can’t spend money on the things you love in order to enjoy your life. Instead, if you want to create a more stable financial future while still enjoying that occasional fancy dinner, you can make some conscious financial decisions, such as saving extra money, creating a budget, and cutting back on unnecessary expenses.
Thinking about the lifestyle changes you might have to make in order to live within your means may seem like a daunting task. Car loans, student loans, your mortgage or rent, and credit card debt are still hovering over you, ready to rain on your parade. The good news is there are ways you can still pay these bills on time while reaching your financial goals—and maybe even have some leftover cash to enjoy doing things you love. To get you started, here are eight tips to help you live below your means.
1. Create a Budget
Budgeting can be one of the most important actions you can take to stop living paycheck to paycheck. If you don’t have a firm grasp on your finances and the amount of money coming in and going out, you may slip into a never-ending debt cycle. Create a budget by calculating your income and expenses. Doing so can give you a clear understanding of whether you’re living within or beyond your means.
To determine how much money you take in each month, consider not only your income but other sources of revenue as well. This may include child support, gifts, your tax refund, or money from side gigs or a second job.
Then, calculate how much money you spend each month. This includes every single transaction you make, including loan payments, credit card payments, insurance, rent/mortgage payments, food, utilities, and other monthly expenses. Each month may be different, so calculate your monthly expenses for six to twelve months and find the average.
Now, it’s time to determine whether you’re living within your means or beyond. Subtract your monthly expenses from your monthly income. If there’s leftover money, great! You’re living within your means. But if you ended up with a negative number, you might be living beyond your means and may need to make a few adjustments to achieve financial security.
2. Track Your Spending
Once you’ve created a budget, consider tracking your spending to ensure you don’t risk the possibility of falling off track. To track your spending, create a spreadsheet or use one of the various budgeting apps available for mobile phones. Recording each purchase is a great way to force yourself to think twice before buying something. This way, you won’t be as inclined to buy that $5 coffee when you know you have some ready for brewing at home.
3. Don’t Rely on Credit Cards
Credit cards are great in that they allow you to make big purchases if you don’t have the money upfront, and the ability to pay off those purchases throughout the month. However, 34 percent of Americans have less than $5,000 in credit card debt, while 12 percent of the population has between $5,000 and $9,999 in credit card debt. Astonishingly, only 35 percent of the American population has no credit card debt at all. These surprising numbers go to show how tempting having a credit card can be.
When it comes to credit cards, lean on only one or two to resist the temptation of overspending. It’s also recommended to have a credit card utilization below 30 percent. This means, for example, if you have a credit card with a $10,000 limit, you should only spend $3,000 or less in order to avoid surpassing the recommended credit card utilization percentage. If you do end up making more purchases on your credit card, it can show the bank you may be in financial distress, which might negatively affect your credit score.
4. Reduce Meaningless Spending
Americans spend a lot of money. In fact, over 80 percent of their yearly income, The Bureau of Labor Statistics found in its latest Expenditures Report for the year 2017. In 2017, the average income before taxes was $73,573, while the average annual expenditures totaled $60,060. These expenditures cover every aspect of American life, from money spent on food ($7,729) to money spent on things like housekeeping supplies ($755).
Fortunately, if you want to live below your means, you can cut back spending in some of these categories. As you track your purchases, ask yourself, “Do I really need this?” Questioning each purchase might help you better understand your priorities and what you really want to spend your money on. By spending less than you make, you might be able to get out of debt, pay off loans, and save up for big purchases. Depending on your interests, here are some areas you can reduce meaningless spending:
- Memberships: Cancel expensive gym, tv, and entertainment subscriptions and opt for cheaper ones.
- Cars: Why buy a new car when it can lose up to 20 percent of its value within a year? Buying used can save you money while still getting you from point A to point B.
- Food and Drinks: Instead of going out for lunch and dinner, pack a lunch and cook at home. Wellio, a food planning service, conducted a study and found going out to dinner costs 5 times more than cooking at home.
- Clothes: Sure, it’s nice to keep up with trends. But do you really need the latest pair of Air Jordans? Spend less on clothes by shopping at second-hand stores or thrift stores.
5. Save From the Start
Before you even get tempted by your paycheck, transfer money to your savings account, 401(k), Roth IRA account, or emergency fund. Most banks and employers allow for automatic transfers, so when you get paid each week or two, funds can be automatically dispersed to different accounts so you can resist spending more than you should.
6. Negotiate Rates and Bills
Many customers think the rates banks and credit unions impose on their services are set in stone. However, these financial institutions want to keep you as a customer, so learning how to negotiate with credit card companies can save you big time. To save money on your credit card bill, ask your credit card company if you’re eligible for a lower interest rate, annual fee, or a long-term repayment plan. Sometimes, even telling your credit card company you’ve found another company with lower rates might convince them to give you a better deal.
If your credit card company is unwilling to negotiate a lower price for your high-interest credit card, consider a credit card balance transfer. Credit card balance transfers can boost your finances by allowing you to pay off any debts with 0 percent interest. Credit card balance transfers may have a small transfer fee and APR, but these add-ons are typically lower than the interest rate of your current credit card, which may save you more money in the long run.
7. Pick Up a Second Form of Income
If you’re really looking to live below your means, finding a second form of income can get you there. If you work a standard 9-5 job, it may be difficult to pick up a second shift somewhere without stretching yourself too thin. Luckily, the gig economy is booming and there are numerous ways you can monetize your hobbies and interests.
Do you have a nice car and like to drive? Uber, Lyft, and other ridesharing services could be looking for new drivers in your local area. Or, have you always dreamt of being a barista? You can turn your lazy Sunday mornings into a productive pastime serving customers at your local coffee shop.
There are dozens of freelancing apps on the market where you can put your talents to use. From home repair to writing and landscaping to professional tax services, there are plenty of freelancing opportunities you can take advantage of to help someone else, all while making money.
8. Downsize Your Home
Just the thought of moving out of the house you’ve turned into a home can bring up all types of emotions. But, purchasing the most expensive home the bank says you can afford may cause you to struggle to keep up with insurance, mortgage, and maintenance payments. Instead, you might consider choosing the fixer-upper that is more affordable and requires just a few, inexpensive home improvements.
Because of the current income-to-housing price ratio, downsizing to a smaller home may be a smarter option to bolster your finances. While having a guest dining room sounds nice, if it’s only used once or twice a year, it may make sense to sell your home and move to a home or neighborhood that is more affordable.
Moving From Paycheck-to-Paycheck to Financial Security
Making the transition to living below your means might not happen overnight. But if you’re determined to create a more stable financial future, spending less money than you make is one way to get you there. At first, this may seem difficult, especially when it comes to cutting back on eating out every night or buying the latest tech gadgets. However, with these eight tips, you’ll have the opportunity to climb out of debt, pay your bills on time, and begin saving for your dream home or even a tropical getaway.