Living below your means is an essential step in your path to financial freedom. However, spending less than you earn goes against the current consumerist culture we live in. Marketers do not profit from our financial well-being, they profit when we act on their high pressure, credit-based, ‘you need it now’ mantra. Go against the grain, spend less, earn more and be happy about it. But it’s easier said than done.
How to Live Within Your Means
Simply put, living below your means, means that what you spend is far less than what you bring in as income each month. And here’s how to go about doing it.
1. Know Your Net Income
It’s great to know what you make. For instance, assuming your income is 40k a year, you need to know what you are actually taking home. How much taxes are you paying to the government each year?
Remove the tax expense, multiply your bi-weekly income by 26 (there are 52 weeks in a year) and you’ll get your true income. You can even go as far as removing retail tax too, by subtracting the percentage of taxes charged in your state.
2. Spend Less Than You Earn
Now that you know how much money you really bring in each month, you can set a budget. This may seem daunting at first but it’s necessary to keep your expenses in check. Use ‘backward budgeting’ or write your income down, then subtract all your expenses from it. If you hit a red or negative, then you’ll quickly know that you’re spending too much.
3. Boost Your Income
Start figuring out ways to earn more money. The number one mistake people make though is that once they start earning more income, they almost immediately raise their expenses as well. This just won’t do!
What you should do, is increase your income but keep your expenses the same. This is how you build wealth over time. Without excess cash or income, you can’t take advantage of opportunities such as investing and it’s going to be tough to grow your savings account.
4. Save Money
Saving money is essential. Rather than making purchases with credit cards or loans, save the money for those things. If you’re unable to save for something, then it just means you can’t afford it yet and there’s nothing wrong with that. Be diligent, keep growing your wealth and you’ll be able to afford those things in the future.
5. Rule Out Credit Cards
Stop using credit cards to buy things. Yes, credit cards can be used for true emergencies but they aren’t recommended. Instead, split your savings into two parts. Ideally, everyone should have an emergency fund and regular savings.
6. You Must Have An Emergency Fund
Start working on this fund today! Think of this as your ‘get out of dodge’ fund and it’ll keep you away from using loans to pay for emergencies.
7. Resist The Urge to Keep Up With Others
Yes, you may come across or have people in your life who seem to have more than you do but resist the urge to “keep up with the Joneses”. Rather than fake wealth, build it over time.
Here’s Why You Should Live Below Your Means
If you need a reason to do this, there’s plenty. Let’s take a look.
1. Reduce Stress
According to one study by the American Psychological Association, finances are the leading cause of chronic stress in America. When you submit yourself to chronic stress your body releases adrenaline and other hormones. If this becomes a regular occurrence, which living outside your means will do, your body adapts and creates a new state of equilibrium.
Unfortunately, your new state of equilibrium has an adverse effect on your memory, heart rate, blood pressure, mood, and immune system.
2. Brighten Your Outlook
Spending less than you earn allows you to start thinking about yourself and what you want to do with your life. The more you save the more flexibility you have. This can lead to doing what you love, whether that is starting your own business, retiring early, staying home with your kids, or being authentic at work. Stop worrying about when your next paycheck will arrive and start taking your future into your own hands. Set yourself up to do what you love.
“Choose a job you love, and you will never have to work a day in your life.” – Confucius
3. Learn Contentment
A critical step in understanding whether you are living below your means is comparing what you spend to what you earn. While reviewing your spending habits, take the time to separate out your essential needs versus your secondary wants. Many of us have grown up in developed countries where consumerism is part of our culture.
The commercials and thought process that we have been exposed to since birth teaches us to want what we do not have. If this culture is taken to heart it will breed inner feelings of discontentment. When discovering what you actually need versus what you want, take a second and be thankful for what you already have.
Chasing the Jones’s is a sure way to live a discontent life, and we surely do not want that. Hebrews 13:5 “Keep your lives free from the love of money and be content with what you have.”
4. Start Owning and Stop Owing
Stop losing your money, time, and hair by means of interest and fees associated with debt. By definition, living below your means helps eliminate debt and opens the door to become an owner. Ownership can make your money work for you rather than you having to work for it.
If you were an owner of one share in the S&P 500 in 1975, your share would be worth more than $2000 today. Not because you worked your tail off but because you were an owner. When ownership and the effects of compounding combine, wonderful things happen! Albert Einstein – “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it.”
5. Give Back
The tangible rewards for giving are amazing. While increasing your possessions beyond your basic needs does not lead to greater happiness, giving your possessions away does. The research shows, the act of giving, increases your physical health, improves your sense of well-being, and can help lower your stress levels. Live below your means and set yourself up to be a giver. Proverbs 22:9 “He who is generous will be blessed, for he who gives some of his food to the poor.”
If you appreciated reason 2 on “brighten your outlook” check out the following video on Slomo, the doc who got away.
Want another take on “learning contentment” check out D
rew Taddia’s podcast on Chasing Possessions.