Most every person who is debt free or financially independent will tell you that one of the keys to their success was to live below their means. In other words, they make a habit of spending less than they earn.
In today’s paycheck-to-paycheck world, spending less than one earns is not very common. So how is it done? How can one learn to live below their means and start securing financial stability? Here’s a plan that can help you start living below your means and building financial security.
How to Live Beneath Your Means
Often times people live above their means because they don’t have any clear-cut financial or life goals. It’s tough to get motivated to manage your money better when you don’t have a solid reason for doing so. Without goals, the you-only-live-once mindset takes over, and money decisions are often made based on what feels good at the time.
This is why we recommend that your first step for learning to live below your means is to determine your “why”.
Why do you want to be out of debt?
Why do you want to build wealth?
What are the reasons that you want to manage your money better?
Be sure that your “whys” are specific and write them down. Do you want more time with your family? Are you sick and tired of being stressed about money all of the time?
Here is our family’s list of motivational whys to give you an idea of how to complete this step.
Where are You At?
The next key to learning how to develop a habit of spending less than you earn so that you can begin building wealth is to assess your current financial situation.
Start by making a list of all monthly expenses. On the Well Kept Wallet “Resources” page in the “Forms” area, you’ll find two valuable tools that can help you with this: the Starter Budget Form and the “How to Create a Budget in 10 Minutes or Less” video for easy budgeting.
Once you’ve made a list of what your monthly expenditures are (if you’re not sure, make an estimate), you can move on to the second part of learning which is making a list of your liabilities. When making the list of your debts, you’ll want to include three key pieces of information:
- Monthly payment
- Interest rate
- Balance left owing
By having a clear cut picture of your debt situation, you can start formulating a plan that will ensure all of the bills are paid and yet still allow you to live beneath your means.
Track Your Spending for 30 Days
For 30 days only, use an Excel Spreadsheet or an online system such as Mint or Personal Capital to track every expenditure. Record your expenditures on a daily basis so that you don’t fall behind and forget some expenditures or leave the task undone until it becomes overwhelming.
At the end of the 30 days, you’ll have a much clearer picture of how much you’re spending on groceries, entertainment, and other non-necessities. This picture will help you determine your next steps for learning to spend less than you earn.
Create a Realistic Budget
Now that you’ve tracked your spending for a month you can create a realistic and doable budget. Using the resources above, create a budget that will allow you to spend reasonably yet still have control over your money. Set monthly spending amounts for fluid expenditures such as groceries, eating out, clothing, gasoline and auto maintenance, etc.
Use a “budgeted” column and an “actual” column, along with a “difference” column so that you can compare at the end of the month your intended spending vs. your actual spending. To help you set amounts for spending, visit this article on recommended budget percentages.
After you’ve used your budget for a month and determined how much you actually spend, you’ll likely find one of two situations.
Scenario 1: I Have LOTS of Extra Money that I’m Blowing Each Month!
If this is the case, yay! Now you can determine which areas you’re going to cut spending in so that you start saving money each month and living below your means. Some ideas for where you can cut spending include:
- Cable packages
- Phone plans
- Entertainment costs
- Gym memberships
- Eating out
After you’ve cut expenses so that you’re living beneath your means, make a plan to put the extra money you’ve found toward debt, or into a savings account, certificate of deposit or other savings vehicle. Designate a portion of your savings toward building wealth through investing if you so choose.
Scenario 2: Our Budget is so Tight it Squeaks!
Some people live above their means because they simply aren’t aware of what they’re blowing money on. Others live above their means because their money situation is way too tight due to debt payments and other obligations. This was us for a long time.
Our monthly obligations totaled more than our income, so it was no wonder our credit card debt was increasing and we were living above our means. But we didn’t realize this and weren’t able to correct the problem until we started budgeting and spend tracking so that we knew how much money we needed to pay the bills each month.
If learning to live below your means is going to take more than simply cutting back, you’re in for some hard work but it can be done. Here are the tips we used to go from having “more month than money” to “getting out of debt and building wealth”:
Use a Challenge Everything Budget
Go through your budget line by line and ask yourself two questions:
- Do I really need to be spending money on this?
- If it’s a necessity, how can I make it lower?
This strategy is going to require some discipline, but you can do it. The challenge everything budget will help you to minimize your expenses as much as you can. Keep your “whys” in plain view for days when you feel discouraged or overwhelmed.
Look for Ways to Make More Income
By increasing your income, you can give your budget a bit more breathing room as you work to pay off debt. Check out this huge list of ways to make money for ideas on increasing your income. Ask your boss for a raise. Work overtime. Do whatever needs to be done to bring more money into your home.
Make a Get out of Debt Plan
When your budget loosens up and you start to have more money than you do bills each month, you can begin accelerating paying down your debt. Check out Dave Ramsey’s baby steps for getting out of debt and building wealth. This is the plan that Deacon used and the plan that we’re using, and it works if you’re willing to work it.
Keep putting that extra money toward debt until the debt is gone, and then move on to making a plan for saving and investing your extra money so that you’ll increase your savings cushion and never again be stuck in a situation where you’re living above your means.
Choose to Persevere
Any person who’s had experience going from paycheck-to-paycheck living to a life of financial freedom will tell you that perseverance is key to financial success. Know that roadblocks and setbacks will come. Navigate through them if and when they arrive, get back on track and keep moving.
Don’t let any circumstance deter you from your dream of living beneath your means so that you can achieve your financial goals.
Do you make a concerted effort to spend less than you earn? How has this step affected your finances?
Personal Capital will allow you to connect to all of your accounts like your bank, investment accounts, etc. This will not only help you see all of your accounts in one place, but it also has a budgeting component where it automatically categorizes your transactions. This is great because you see exactly where all of your money is going each month!