Living Below Your Means: Signs You Aren’t And How to Fix It
Living below your means doesn’t mean living like a pauper. It is one of the smartest personal finance decisions you can make for yourself. When you spend less than you make, you leave money to save for the future, which is your most important financial asset.
If you don’t live below your means now, keep reading to learn how you too can prepare yourself for the future.
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What Does It Mean to Live Below Your Means?
Many people wonder how living below your means works. It’s a simple concept that means you spend less than you make. Surprisingly, 60% of Americans spend more than they bring in each month, resulting in massive credit card debt, which puts you even further into the hole.
While it sounds like a simple concept - don’t spend more than you make, it’s harder than it sounds to put into practice. Fortunately, there are simple ways to make it easier on yourself.
Why Is Living Below Your Means Important?
When you spend everything you make (and more), you don’t leave any money to add to your net worth. Rather than building an empire or legacy, you transfer your wealth to others by constantly paying for other goods or services.
It’s important to ask yourself, ‘is spending money right now more important than my financial goals?’
Your financial goals can be short-term, such as buying a house or taking a dream vacation, or long-term, such as paying for your child’s college education or saving for retirement.
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5 Signs You’re Living Beyond Your Means
Some people are aware they live outside their means, but for others, it’s not as obvious. Here are five signs you’re living beyond your means.
You Have Credit Card Debt
If you use your credit cards to live and don’t pay the balance in full each month, you’re living beyond your means. Credit cards should help protect your large purchases and/or help you earn rewards (cashback, etc.) but shouldn’t be an extension of your income.
If you can’t pay the bill in full each month, you’re using your credit card to live beyond your means.
You Aren’t Prepared for Emergencies
If you don’t have at least 3 to 6 months of income saved, you aren’t prepared for an emergency. What would happen if you lost your job or fell ill and couldn’t work? An emergency fund should get you through 3 to 6 months of expenses (longer if you want to be prepared for another pandemic).
If you don’t have at least this much set-aside, you’re living beyond what you can afford and should cut back.
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You Don’t Have a Rainy Day Fund
A rainy day fund covers unexpected expenses that aren’t in your budget. For example, your car breaks down or your hot water heater breaks. If you live paycheck-to-paycheck, you may not have extra funds to cover the expenses.
A rainy day fund is a separate account you can dip into to cover expenses like this, so you don’t use your credit card.
You Don’t Use a Budget
If you don’t use a budget, you don’t know how much you spend each month compared to what you make. You might be ‘okay,’ but you won’t know unless you track every dollar you bring in and spend.
A budget tells your money where to go and ensures that you save money in all the right places, including your emergency fund, rainy day fund, and retirement savings.
You Spend Without Thinking
If you spend because you want to and don’t think about the future, you could be living beyond your means. Instead, you should plan your purchases, ensuring they fit within your budget and allow you to still save for the important things that will matter in a year or more down the road.
7 Ways to Live Below Your Means
It may feel impossible to live below your means right now, but with a few careful steps, you too can make living below your means a reality.
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Create and Use a Budget
It’s not enough to create a budget; you must use it too. The right budget allocates your income between expenses, savings, and financial goals you have for the future. Tracking your spending, meaning every dollar you spend, is the only way to start living below your means.
When you use a budget, you see where you’re spending money and where you can cut back. It’s easier to see when it’s all laid out in front of you.
Stop Using Credit Cards
Credit cards have their time and place, but if they serve as an extension of your income, stop using them. If you use credit cards when you can’t afford something, they aren’t the right financial tool for you.
If you have credit card debt, get out of it as fast as you can. The money you spend on interest is an opportunity cost for other investments and opportunities that could help you financially in the future.
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Cut Back on Unnecessary Expenses
When you create your budget, pay close attention to the categories you spend the most money in each month. Prioritize your spending and cut back on the expenses that aren’t necessary.
Here are a few common areas many people cut back:
- Memberships or subscriptions you don’t need
- Coffee shop stops
- Eating out
- Excessive spending on groceries
- Grooming appointments
- Impulse shopping
Find a Way to Earn Passive Income
Passive income is a great way to increase your income, especially if you can’t find anywhere to cut back on your expenses. Passive income is money you earn without actively participating. Sometimes you may have to put time and energy into it upfront but then earn passively afterward. Examples of passive income include:
- Investing in stocks or bonds
- Investing in real estate
- Writing an ebook
- Creating a course
- Selling stock photography
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Downsize Your Home
If your home takes up too much of your income, consider downsizing. Look at the big picture of what you spend on your home. Include the mortgage, real estate taxes, home insurance, and utility costs.
Do the costs take up over 50% of your income? If so, consider downsizing to decrease the cost of living and to have more money available to save for future goals.
Automate Your Savings
We’re all programmed to save last. We get paid, pay our bills, and then spend our money. We don’t think about saving until we do everything else, which often leaves no money to save.
Instead, automate your savings - set up direct deposit with your employer for 10% or more of your paycheck or set up an automatic transfer with your bank, so you automatically send money from your ‘spend account’ to your savings account without thinking. Just make sure you include the amount in your budget.
Stay on top of the latest financial news and make changes as necessary. If you invest, use a robo-advisor unless you know you’ll stay on top of the market trends and adjust your portfolio as things change.
Learn about new techniques to save money or how to continue living below your means. The personal finance landscape changes often - stay on top of the latest news, so you are always at the forefront of your finances and make the most of your money.
Final Thoughts - Living Below Your Means
Living below your means is crucial to your financial future. You must find a way to have money to save for the unexpected. If 2020 taught us anything, it’s to be prepared for the unexpected.
While we all hope we stay healthy and work most of our lives, anything could change in the blink of an eye. Live frugally now, use your money wisely, and invest in your future, so you have a healthy personal financial future ahead.