14 Effective Ways to Live Below Your Means

a family living happily below their means

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What does it mean to live below your means? 

Simply put, living below your means is when you spend less than you make. As a result, you have money left over each month to achieve your financial goals.

Spending less than you earn helps you stay out of debt and helps you reach financial independence. You’re less likely to live paycheck to paycheck when you learn to live below your means, and you’re more likely to reach your financial goals sooner.

In this article, we’ll talk about different aspects of living below your means, as well as how to do so.

Let’s jump right in.

Signs You’re Living Above Your Means

Living above your means is when you spend more than you earn. There are several signs that you might be living above your means, and this can be risky long-term as you may find yourself deep in debt or in a situation where you don’t have enough money to cover an unexpected expense. Living above your means may also mean that you won’t reach your financial goals because you’re spending every dollar you earn as well as spending money you don’t have.

Here are some indicators that you may need to re-evaluate your financial situation.

Your Emergency Fund is Low or You Don’t Have One

An estimated 39% of Americans can cover a $1,000 emergency. If your emergency fund is low or you don’t have one at all, you may be spending too much money and not saving enough. 

Not having an emergency fund is risky, as if something unexpected comes up, you may be forced to swipe your credit card and fall into debt. A single trip to the emergency room or a broken-down car could run you $500 to $1,000 or more.

Financial experts generally agree that having three to six months of living expenses in an emergency fund is wise. Saving at least $1,000 in a savings account for unexpected expenses is a good place to start if you can’t cover a full six months.

It makes sense to store your emergency fund in a separate bank account. CIT Bank has a Savings Builder Account, which makes for a great emergency fund. You’ll have easy access to your money for when you need it and earn up to 20 times the average interest rate of a brick and mortar bank.

You Have Credit Card Debt That You’re Struggling To Pay Off

You may be living above your means if you have excessive credit card debt that doesn’t seem to go away. Having credit card debt that takes you over a year to pay off is a possible sign that you’re spending too much. 

Reel in credit card debt by making more than the minimum payments each month and thinking twice before you pull out your card to buy something.

This article goes over two methods of paying off debt and shows an example of how much you can save by applying just a small amount extra to your minimum payment each month.

If you spend too much, consider the 7-day rule, where you don’t allow yourself to buy something until seven days have passed. If seven days pass and you still want the item, then consider buying it. Often, if you were thinking of buying something on an impulse, that impulse will be gone after a week.

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You Have Trouble Saving Money

One way to save money is to automatically transfer a small amount of cash from your checking account to your savings account with each paycheck. If you’re having trouble saving any amount of money, you may be living above your means.

Set up automatic transfers to help remedy this. Starting with even $10 per week can go a long way to help teach you good saving habits.

As you adjust your financial situation to spend less and/or earn more, you can potentially start saving more each week to better your financial future.

You Buy Things You Can’t Afford

You may be living above your means if you find yourself buying things you can’t afford. This could be lavish clothing, expensive meals out, various items on Amazon, or anything you frequently buy that leaves you further in debt.

If you’re an impulsive spender, check out this article for ideas on how to curb your impulses. Getting your spending under control is an important aspect of living below your means. Understand the difference between things you need and things you want. 

We often overlook that purchasing things for ourselves doesn’t usually make us happy. The feeling we get from buying new things is often short-lived, and guilt and shame can come later when the credit card statement comes in. This is why it’s important to differentiate between things you want and things you truly need, especially when you have trouble controlling your spending.

Benefits of Living Below Your Means

Living below your means has benefits that affect several aspects of your life. Let’s go into three huge benefits.

Reduced Financial Stress

Reduced financial stress means you’re able to sleep better at night, knowing you have enough money to cover all of your expenses. Financial emergencies, such as a trip to the ER or a broken-down car, will be less scary when the bill arrives because you’ll have saved money up for these occasions.

Reduced financial stress also means your relationships are more sound. When you and your spouse live below your means, you’ll both have less money worry, and that can lead to a more cohesive marriage. Getting on the same page as your spouse financially is an important aspect of a healthy marriage.Reach Your Financial Goals With Greater Ease

When you spend less than you earn, you’ll have a surplus of money each month, which allows you to reach your financial goals with greater ease. Your financial goals may involve paying off your credit cards, saving for your children’s college, buying a house, or going on a dream vacation. You may also have a goal as simple as no longer living paycheck to paycheck.

Whatever your financial goals are, living below your means will help you reach them more successfully.

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More Flexibility Around Work

One can always find ways to earn more money, but perhaps you don’t want to. Perhaps you’re interested in working an easier job or a job that requests fewer hours from you. When your living expenses are lower due to spending less, your monthly income requirements are also lower.

This gives you flexibility in what you do for a living. You may be able to work part-time or live off of one or more side hustles. Flexibility around work can give you more free time, giving you more time to pursue hobbies and other dreams.

So if reducing how much or how hard you have to work is at the forefront of your mind, then cutting your spending and lowering your expenses may be one way to achieve this.

How To Live Below Your Means

There are many steps you can take to better your financial life. Let’s go over various methods on how you can start living below your means.

1. Create a Budget

Creating a budget is a typical first step to identifying ways to live below your means. When you create a budget, you’ll be able to see where your money is coming from and where it’s all going. This will then help you reallocate and save money if you’re spending too much in one category. If you need more control over your finances, try using cash envelopes, detailed here.

Revisit your budget as frequently as you need to. This may be annually, quarterly, or monthly depending on your situation.

Start by figuring out how much money you have each month by adding up your income sources. Many believe in the 50/30/20 rule, which states 50% of your money should go towards needs, 30% to wants, and 20% should be saved.

By creating a budget, you’re on your way to living below your means because you’ll always know how exactly to spend your money going forward. 

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2. Track Your Spending

After you’ve created a budget, start tracking your spending. Write down the amounts when you make a monthly payment to your rent, mortgage, utilities, and other regular bills. By tracking your spending, you’ll see exactly how you’re spending money each month.

At the end of each month, add up all of your spending, and identify where you can cut back. If you can cut your spending each month on specific things, you’ll have more cash to save or allocate towards debt, such as credit card debt.

For example, if you’re spending a lot on going out to eat, you could curb your spending by going out to eat one less time per week. This could save you over $100 per month alone, putting that extra money in your pocket for other use.

Things to track your spending on include:

  • Grocery bills
  • Utility bills
  • Entertainment budget
  • Meals out vs. eating at home
  • Subscriptions that you might not be using as much
  • Online shopping

Tracking your spending will help you live on less money and, in turn, help you live beneath your means.

The app Trim can help you cut back on spending for specific categories. Trim negotiates your cable, internet, and phone bills, as well as identifies subscriptions you may no longer be using. Trim is “mostly” free in that it charges you a portion of what you save, meaning if the app fails to save you any money, you don’t pay anything. Check out Trim here.

3. Automate Your Savings

Once you’re spending less money, another good financial move to make is to automate your savings. To do this, set up an automatic transfer between your checking account and your savings account each pay period or each month.

The benefit of automating your savings is that you don’t need to think about it anymore; that is, by putting your money on autopilot, you’ll save consistently.

If your savings account has at least six months of living expenses, consider setting up automatic investments from your checking account to an investment account, such as a Roth IRA. Your money will grow faster with a solid investment plan.

Aside from automating your savings, you can also automate all of your finances. This way, you’re automatically paying your bills, including debts like credit card debt, personal loans, student loans, and similar. You do this by setting up autopay on any expense that supports it. 

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4. Lower Your Monthly Expenses

Some monthly bills can be negotiated or lowered through practical means. For example, you can generally negotiate your cable, internet, phone, and auto insurance bills. 

Some of us may not like the idea of going back and forth with a company and trying to reduce our rate. If you fall into that crowd, check out the app Trim

Reducing other expenses, such as your utility bills, cell phone bills, transportation expenses, and the amount you spend on memberships such as a gym membership will also help you in the long term.

If you have a health insurance plan that can be adjusted, you can consider lowering your premium by raising your deductible or changing your coverage options. Doing so should be based on how much coverage you feel you need or are using.

By lowering your monthly expenses, you’ll have more money left over each month, meaning you’ll be more likely to have ease living below your means. You’ll be able to increase your savings rate, which is the percentage of money you save as compared to your total income for the month.

5. Drive a Used Car

According to LendingTree, the average new car monthly payment is $563. For used cars, the average payment is $397. You can reduce these payments further by buying a used car for less money, such as buying a used car that has over 100,000 miles on it. 

A new car loses around 20% of its value after the first year, meaning if you buy a certified preowned car that’s one year old, you could save up to 20% off the price. That means a $30,000 car is now $24,000, or a savings of $6,000.

Buying preowned or used cars means lower monthly car payments. For example, if you purchased a $10,000 used car and put $1,000 down and financed the rest over 48 months, you would only pay $199 per month, assuming a 3% interest rate.

When shopping around for a used car, make sure to do your homework. Buying a used car that has issues can end up costing you more in the long run. Have a trusted mechanic inspect any used car you’re thinking of buying.

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6. Downsize Your House

You may have purchased a house that’s more than you need or can afford. If your mortgage payment is too high and it’s causing you to have financial issues, it may be time to consider moving to a smaller or less expensive place. 

Your combined monthly mortgage, taxes, and insurance should add up to less than 28% of your gross monthly income. If you’re higher, you may be living above your means. You can attempt to increase your earnings or cut back in other areas. If nothing seems to work, then it might be time to look around for a new place.

Moving has expenses in itself, and there can be a hassle to buy a new house and sell an existing house. Downsizing may be one of your last resorts if no other methods to live below your means are working.

7. Build an Emergency Fund

Living below your means also means having an emergency fund that can cover the times when an unexpected expense occurs or if you end up living without an income for some time. 

Having at least $1,000 in your emergency fund at all times can cushion minor setbacks. That said, financial experts generally agree that it’s wise to store three to six months’ worth of living expenses in a safe place, such as a high-interest online savings account.

One way to start building an emergency fund is to determine an amount of money you can save each week and then transfer that money to your savings account either weekly or whenever you get paid. Alternatively, picking up a temporary side hustle to raise money quickly has benefits.

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8. Create Multiple Income Streams

Another way to live below your means is to raise your income so that you have more money to live off of. You can raise your income through several means, including taking on a side hustle or building passive income.

Side hustles are a quicker way to earn more money but generally require more of your time. Passive income starts as a trickle but will eventually be money that you earn on autopilot. 

Some side hustles can turn into passive income, combining the best of both worlds. An example of this is blogging. Learn how to blog for profit in this beginner’s guide. Some side hustles can even be done from bed.

An added benefit to increasing your income is that you can continue to enjoy what you love in life without the stress of how you’ll afford it. By bringing home more money each month, you have the flexibility to save some and spend some. This gives you plenty of opportunities to build wealth while also enjoying different aspects of life with your friends and family.

9. Don't Rely on Credit Cards

While having a credit card has benefits, relying on your credit card too much can hurt your financial well-being. Focus on paying off high-interest credit card debt as soon as possible. 

If you struggle with swiping your card too much, consider locking up your cards until they’re paid off. Instead, use cash whenever possible and work out a plan to tackle your debt.

According to the 2019 Experian Consumer Credit Review, the average American has $6,194 in credit card debt. That said, the median debt stood at around $2,700, as found by ValuePenguin. If you’re finding yourself with high credit card balances, then it may be time to re-evaluate your spending and come up with a plan to pay them down. 

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10. Understand Need versus Want

Every time you’re about to make a purchase, ask yourself if you need it or do you simply want it. Needs include things like:

  • Housing
  • Food
  • Utilities
  • Transportation
  • Health Care

On the contrary, wants include things like:

  • Eating out
  • Games
  • Clothes outside what's needed for everyday work and life
  • Entertainment
  • Luxury items
  • Streaming services
  • Alcohol

If you’re struggling to live below your means, focus on your needs and stay away from buying too many wants. Remind yourself of everything you already have and find enjoyment in those things.

Understand that marketers constantly show us things that they want us to buy. Think commercials, ads, and billboards. The thing is, we don’t need most of these things at all. Once you’re able to separate your needs from your wants, you’ll be on the path to spending less money and building more wealth.

11. Curb Impulsive Spending

Do you sometimes see something and then immediately buy it before you have a moment to think? This is called impulse spending. This activity is very common on the internet on websites like Amazon, where you can simply click one button and purchase something.

One easy method to curb impulse spending is to delete your credit card information from every online store. This will add a few manual steps to each transaction to slow you down and allow you to think twice.

Additionally, ask yourself, “How will this purchase affect me in 30 days? 90 days? 6 months?” If you feel that there’s no long-term gain for the purchase, then it’s likely you don’t actually need to buy it.

Check out this guide on how to curb impulse spending.

12. Pretend Like You’re Broke

Pretending like you’re broke is a mindset that will help you save money with every action you take. When you act broke, no matter how much you earn, and by living frugally, you’ll maximize your savings month after month because you’ll spend as little money as possible.

It’s tough to get into this mindset, but the rewards are worth it. You’ll lock every dollar away to use in creating more financial security for yourself.

Of course, when you pretend like you’re broke, it doesn’t necessarily mean you need to be cheap about things. You’ll still want to buy quality products where it makes sense. Instead, what it means to pretend like you’re broke is to not spend money frivolously on things that add to your debt or eat up money that you’re trying to save for the future.

13. Enjoy What You Already Have

Avoid buying new things by enjoying the things that you already have. We accumulate stuff as humans, and oftentimes we can still find enjoyment in the things we’ve accumulated over the years. 

Buying new things all the time is an expensive habit that can cause financial stress and put us in debt. Instead, find enjoyment with what you already have and don’t continuously buy new things that won’t serve to make you happier anyway.

When you do buy things, consider if what you’re buying will last you for years to come. Will this purchase keep you entertained and happy for many years, or is this something that will outlive its use in a few days? These are legitimate questions to ask yourself when spending money on things while money is tight and when you’re trying to live below your means.

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14. Learn More About Personal Finance

Through reading books and blogs, you can learn a lot about personal finance. When you better understand how money works, you’ll have knowledge that allows you to improve your financial well-being. 

You’ll save more, invest more, pay off debt, and spend less. You may also find ways to earn more money. Financial stress is reduced when you have a better education around money.

Check out Clean Cut Finance’s recommended books to start learning more about how to make your money work for you more effectively.

Wrapping It Up

In this article, we discussed how to live below your means and why it makes sense. Through smart savings and reducing your spending, you’ll have a more financially secure life. You’ll be able to reach your financial goals and live with less stress.

What are some methods you’ll use to live below your means?