Ask a group of money nerds the best way to get rich, and you’ll likely receive a handful of juicy tips for building your nest egg. While new advice pops up on occasion, most financial gurus stick to a list of tried and true favorites. Living below your means is one such piece of financial advice.
What does it mean to live below your means, and can it really lead to greater wealth?
The Definition of Living Below Your Means
Living below your means is often defined as paying for all of your bills in full each month. Simply put, you spend less than you earn and never purchase more than you can afford. You can use credit cards to pay for your expenses, but you never need to carry a balance on them.
If you’ve never saved money before, living below your means will point you in the right financial direction. It can help you stop living paycheck-to-paycheck and help you focus on long-term goals.
Living Below Your Means Won’t Generate Significant Wealth
In theory, this may sound like the ticket to wealth, but unfortunately, it doesn’t always work. If you make a lot of money, living below your means is an easy way to build assets. If you don’t, it could be downright impossible.
When we focus on living below our means, we typically think about decreasing expenses and cutting costs. The trouble is you can only trim so much. If you don’t earn a decent wage, you can’t save a significant portion of it.
Without a sufficient financial support system, many hard-working individuals and families cannot save a considerable portion of their income.
Living below your means often emphasizes a lack of spending, but income is just as important, if not more important than cutting costs.
After all, it’s a whole lot easier to earn $100,000 a year and spend less than $75,000 than it is to make $50,000 a year and live off of $30,000.
Living Far Below Your Means
The real trick to accumulating wealth isn’t just living below your means. In most situations, it’s living far below your means. To get rich, you need to widen the gap between how much you earn and how much you spend.
You can do this in one of three ways.
- Earn more.
- Radically cut costs.
- Do both.
To significantly widen the gap, you can’t usually just trim expenses. In the best-case scenario, you should focus on earning more while simultaneously spending less. The larger the gap grows, the more money you can save and invest.
Making more money isn’t easy. If it were, everyone would do it. If you can’t work both sides of the equation, start with cutting costs; but if you have the means to increase your income, do both.
An Example of Living Below Your Means
How does living far below your means result in accumulating wealth?
Let’s run through a hypothetical example. Say I earn $60,000 a year and save 10% of my income. In this scenario, I can set aside $6,000 for saving and investing. Technically, if I can save $6,000, I live below my means, but I’m not making much progress towards building wealth.
Now imagine, I cut back on my expenses and save 30% of my salary. Now I can save $18,000 a year instead of just $6,000. $18,000 can grow much faster than $6,000.
Let’s fast forward a few years as my imaginary income continues to grow. Let’s imagine I earn $80,000 a year in the future, but I don’t inflate my lifestyle. Now I can save $24,000 a year, and I can keep even more if I continue to downsize.
If I can continue to whittle away at my expenses, I can save 30, 40, or even 50% of my take-home pay each year. If I can raise my income, it becomes even easier to keep a large portion of my salary.
A Modest Lifestyle is Easier to Maintain
Financial experts often argue over the importance of earning more or spending less. The truth is both are incredibly important, and neither should be overlooked.
Trimming your expenses is often more manageable than earning more money. It also results in a more modest lifestyle that is easier to maintain.
If you spend a lot on car payments, house payments, food expenses, and other big-ticket items, you’ll need a lot of income to pay those bills in retirement. But if you downsize your lifestyle and live far below your means, you won’t need as much to cover your expenses.
You’ll need less money to live, which means you won’t need such a large nest egg after walking away from your job.
How To Live Below Your Means
So how can you live below your means? Typical financial advice includes living frugally, spending mindfully, and convincing yourself to stop buying unnecessary. It also entails the value of the latte factor and cutting out avocado toast.
These may be valid methods of cutting back, but they don’t tell the whole story. Other techniques may produce a bigger bang for your buck.
If you want to live below your means, check out the methods below:
Calculate Your Hourly Pay
Most of us think we earn more than we actually do. We look at the total amount of our annual salary and see a big, fat round number. Maybe it’s $40,000 a year; perhaps it’s $80,000. The amount doesn’t matter; what does matter is that it provides a false sense of security.
How much do you pay for medical insurance, dental insurance, social security, and taxes? Each of these line items whittles away at your paycheck before you bring it home.
To live below your means, you should figure out how much you earn per hour rather than how much you make per week, month or year.
How much is $68,000 a year after accounting for expenses and taxes? How much is $51,000 or $80,000? Your starting number doesn’t matter. It’s the number you bring home that matters.
This number is unique to each of us. So grab your paystub and review the figures you see. Take the amount paid and divide it by the number of hours you work each week. Use this information to calculate your hourly pay.
Consider the Amount of Time it Takes to Buy Something New.
When you calculate your pay rate, you can see just how long it takes you to pay for something new. Let’s say you want to buy a new shirt. You flip over the price tag and see it costs $50.
$50 may or may not seem like a lot of money, depending on how much you earn. What if it takes you three hours to make $50? Is that shirt worth three hours of your time?
The easiest way to live below your means is to see just how long it takes you to earn money to buy new things. As you run the calculations, you will quickly find yourself asking, “Is my time worth this new thing?”
This technique resets your mental money model. It forces you to contemplate your decisions carefully.
It’s easy to throw items in the cart when we don’t think about the hard work needed to pay them off, but the more often you can say “no” to buying something new, the more you can save your money for a rainy day.
Cut Back on Expenses
To live below your means, you must cut out unnecessary expenses. Now is the time to negotiate your bills, ask for discounts, and cut out unnecessary subscriptions. Grab your credit card bill and a bright yellow highlighter and mercilessly slash through your expenses.
Keep in mind; the goal is not to live like a penny-pinching miser. Ask yourself which purchases bring you joy and which don’t. If something isn’t making you happy, cut it.
These small changes will impact your overall expenses, but most won’t help you live far below your means. If you want to live far below your means, you have to cut the big-ticket items.
Housing, transportation, and food take the biggest bite out of your bank accounts. So these are the purchases you should spend the most time refactoring.
Can you purchase a less expensive but trustworthy vehicle? Can you downsize your house or live farther out in the country where real estate is cheaper?
It’s easier to live below your means when you are young and single. If you’ve recently graduated from college, search for alternative forms of housing. Live in a group house or bring on roommates to help you split the rent.
Review these items carefully. They will provide the best chance for living far below your means.
Find Ways to Increase Your Income
As I mentioned above, you can cut out tons of expenses and still find yourself at a standstill with your money. Whether we like it or not, the best way to live far below your means is to bring in more money.
So how can you earn more? Put your best effort into building your career, particularly if you are young. Ask your boss what your organization needs and how you can improve things at work.
If your employer will pay for additional training or certifications, sign up for them. If they are willing to pay for an advanced degree, take them up on the offer.
When you have down days at work, teach yourself new skills or find a system that you can make better. One year, in between projects, I fixed an old system that required manual updates. While my coworkers took long lunches, I sat at my desk writing code. At the end of the year, I received the highest rating and a significant raise.
If you can’t grow in your current job, look for work elsewhere. Focus on designing a killer resume and learn how to negotiate for a higher salary.
Consider Alternative Forms of Income
If you can’t make much progress at work, look for additional ways to earn. Can you sell items on Etsy, walk dogs, build websites, drive for Uber, or deliver groceries?
Our 9-to-5 positions often provide the most significant potential for long-term growth but don’t rule out alternative forms of income. Think outside the box of traditional income streams.
At the beginning of your career, it makes a lot of sense to focus on earning more from your day job. As you seek financial growth, you might venture off into new income-earning adventures like owning a small business or purchasing real estate. Search for ways to grow outside of your primary career.
Learn to Be Content With All That You Have
The easiest way to stop spending money is to stop wanting more stuff in your life. Learn to meditate, feel confident in your skin, and stop comparing yourself to others.
Search for ways to live a simple life with less and stop buying unnecessary stuff you don’t need. When you learn to enjoy the simple moments of life, you’ll quickly turn away from consumerism and begin to feel content with all that you have.
Understand the Power of Investing
If you want to build wealth, you can’t just toss your money into a savings account. To get rich, you must invest your money and let it work for you.
Living below your means allows your dollars to create future wealth long after you don’t want to work anymore. Eventually, your money can outpace your earning power, and it can continue to grow long after you quit.
What are the Benefits of Living Below Your Means?
Living below your means may help you acquire wealth and riches, but it can also lead to other powerful benefits. Thanks to a plushy financial cushion, you can significantly reduce the amount of stress, anxiety, and financial fears you feel.
With less stress and fewer worries, you will form better relationships with those you love and experience fewer arguments and fights.
The First Step to Building Wealth
Living below your means is the first step to building wealth. It’s often easier to cut expenses than it is to earn more money, so start at the easiest place and move forward from there.
Just remember you can only trim so much from your budget, so think long and hard about other ways to increase your income. Try your best to increase the gap between what you earn and what you save.
I wish you the best of luck!