You might have heard the financial advice to “live below your means” in the past, but its true meaning isn’t inherently obvious. It’s good financial advice, and one of the best habits to adopt if you want to pay off debt, build wealth, and set yourself up for a bright financial future. But how does it work, and what steps can you take to achieve it?
What Does It Mean to “Live Below Your Means?”
Let’s start with a simple description of “living below your means,” and how it relates to finances. Your “means” in this scenario is your spending power, or how much money you make. If you make $3,000 per month, for example, you can spend $3,000 per month without going into debt. If you spend $3,000 exactly, you’re technically living within your means, since you’re not exceeding that spending power.
Living below your means requires you to reduce your spending further than that; for example, you might spend $2,600 per month, resulting in a $400 monthly surplus.
The Benefits of Living Below Your Means
There are several benefits to living below your means, including:
- Saving money. The first and most obvious advantage is your ability to save money. If you’re earning $3,000 a month and spending $2,600, you’ll end up with $400 leftover, or $4,800 per year. You can use that extra money to pay off your existing debt, helping you become debt free. You can allocate it to an emergency fund. You can even use it to contribute to a retirement plan or invest in property, stocks, and other assets. The point is, you’ll free up extra money for yourself every month.
- Reducing expenses. Living below your means also forces you to reduce your total expenses in many cases. If you look carefully, you can probably find unnecessary costs to cut, eliminating the expenses that would otherwise be simple waste.
- Sticking to a budget. To live below your means, you need to thoroughly understand both your earnings and your expenses. In other words, you have to create (and stick to) a budget. Practicing consistent budgeting is a valuable financial strategy, and one that can help you well into the future.
- Maintaining a lifestyle. Most people suffer from an effect called “lifestyle creep.” If you indulge in a luxury on a regular basis, you come to see it as a new normal, rather than an optional additional expense; for example, your daily morning latte at the expensive coffee shop becomes a staple of your routine, making it hard to get rid of. Over time, lifestyle creep can wreak havoc on your budget, and set you up for bad financial habits. Living below your means forces you to get used to a more frugal lifestyle, so you keep your spending habits in check long-term.
How to Live Below Your Means
On the surface, living below your means is a simple concept. All you have to do is reduce your expenses and/or increase your earnings to broaden the gap between them. In practice, of course, things are a little more difficult.
These are some of the best strategies to help you live below your means:
- Find less expensive housing. Housing is going to be one of your biggest expenses, so it’s one of your best opportunities to make a change that lets you live below your means. For example, if you live in a nice house, paying $1,200 per month in rent, you may be able to find a slightly smaller apartment for $1,000, helping you save $200 a month.
- Eliminate unnecessary subscriptions. Check your budget for subscriptions and entertainment costs that aren’t necessary for your lifestyle. Because these are charged automatically every month, they’re easy to forget about—and they accumulate quickly. Get rid of any services you aren’t actively using, and consider cutting the ones you don’t strictly need.
- Look for opportunities to cut costs. There are likely many opportunities for you to cut costs by reducing the size, quality, or frequency of your purchases. For example, going out to eat once a week instead of every day can help you save a ton of money.
- Pick up a side gig. Of course, living below your means isn’t just about saving money and cutting expenses; it’s also about increasing your income. You can generate more revenue by picking up a side gig or a part-time job, making money doing something you enjoy.
Living below your means isn’t just generic advice; it’s one of the best financial strategies for long-term success. The sooner you start keeping your spending under control, and the more attention you pay to your monetary habits, the sooner you’ll start reaping the benefits.