My grandfather shopped at discount stores, cut coupons, ate the early bird specials, and lived in a two-bedroom condo. Typical grandparent, right?
The only big expense I knew him to have was that he drove a Cadillac and got a new one every three years. While he took my family to brunch every Sunday and lavished me with gifts, he and my grandma would go to McDonald’s every day for a $0.99 ice cream cone. When he died, I discovered through his bank accounts that he lived off the interest of his investment accounts, bought his Caddy’s with cash, and that he was a millionaire. Surprise!
When you hear about some of the world’s richest people like Warren Buffett, whose net worth is estimated to be $84 billion, you don’t hear about fancy cars and huge mansions. Like my grandfather, Buffett boasts that he eats McDonald’s breakfast every day — spending only $3.17. My grandfather and Buffett may seem like old-timers but they live below their means, which means they don’t spend their money on fancy things, don’t go into debt, invest their money, and lead simple, yet comfortable lives.
Living below your means can help guarantee you also live a long, comfortable life without worries or cares.
10 ways to live below your means
When you are just starting out it feels like living paycheck to paycheck is the norm. How will you ever spend less? There are ways to trim and get you ahead.
Set a budget and create financial goals
First things first: in order to understand your means and where you can save, you need to examine your budget. Start with your income and your recurring expenses like your rent or mortgage, car payment, and utilities. Are these in line with the 50/30/20 you should be following?
Next, review your bank statements to see where the rest of your money is going. How much of it is on dining out, clothing, travel, and other expenses deemed discretionary? Now, compare your expenses to the 50/30/20 formula. Where are you over and what can you cut back on to get into a healthy place?
Once you have a budget, set some goals for your financial future. These don’t need to be 10-year plans. Start with baby steps and think of what you’d like to accomplish in the next three months, the next six months, and the next year. These could be simply sticking to your budget for the first three months, saving toward a vacation by six months, and investing 5% of your income in your first year. Whatever motivates you!
Pay yourself first
Although the financial formula finds it healthy to send 30% of your income and save 20% of your income, be sure you focus on the saving portion before your spending. Too often the end of the month comes and I’ve found myself saying I’ll put aside the savings money but other things have gotten in the way: a friend invites me to a concert, a wedding came up and I needed to buy gifts and travel… you know the drill.
Make it a priority to save before you spend. If you receive direct deposit paychecks, ask HR to put 20% into a savings account and the remaining 80% into your checking account. If they don’t offer that service, set up an automatic transfer of 20% from your checking to your savings account on payday. For example, if your take-home pay is $1,200 every two weeks, schedule a transfer through your bank to take place every two weeks and move $240 automatically into your savings. If you don’t see the money in your checking account, you’ll be less likely to spend it.
If you don’t trust yourself not to dip into your savings account, consider setting up a CD, or Certificate of Deposit. This is like a savings account but you are not allowed to touch the money in the account for a fixed period. This could be a month to five years (or more).
Buy a cheaper house than what you are approved for
Having good finances can be a hindrance in that when it comes time to purchase a home you may get pre-approved for a larger amount than you need. When I was looking to buy my first place at 25, I was pre-qualified for $350,000. Although I just wanted a small condo, realtors showed me properties “just a little” outside of my price range. Before I knew it, I was looking at $400,000 four- to five-bedroom houses. Could I afford it? Technically. But I would have been pushing my means.
Just because you can doesn’t mean you should. Whether you are renting or looking to own, determine your budget limit and, if you can, reduce it.
Shop discount stores and thrift stores for clothing
Unless there is an emergency, such as you broke the heel of your shoe while you are away from home, buying clothing at full retail is a waste of your money. Discount shopping can save you and still keep you fashionable.
If you want to shop at your favorite stores, ask the sales clerks what the sales schedule is. Many times they will be happy to tell you new items you see will be on sale in three weeks and that all you need is some patience. You can also shop your favorite stores if you head straight to the back of the store and only shop the sales racks, saving you up to 75%.
If you’re really patient, shop end-of-season sales. You may not have a chance to wear a pair of winter boots until the following winter, but they’ll be brand new and perhaps half the cost as when you purchase at the start of winter.
Thrift stores and discount outlets also offer sales and prices slashed on name brands. Consignment shops may specialize in designer brands that have been previously worn but are still in great shape.
Cut back on eating out
It shouldn’t come as a shock that dining out costs more than if you cook at home. Consider lunches out during your workweek: five days of a soup and salad special that costs $10 sounds like a great deal, but it equals $50 a week, which is $200 per month. However, a loaf of bread and the fixings along with soup from the grocery store will cost half of that.
Cooking a little extra at dinner each night could mean leftovers the next day, giving you two meals for the price of one.
Plus, using grocery store coupons and taking advantage of store sales, such as 10 cans of soup for $10, can help you save too. And don’t forget that store brands, aka generics, can save you up to 30% on your groceries, no coupon clipping required.
Drive a used car
That shiny, new car you have your eye on my have 10 miles and not a scratch on it but a car’s value can drop by as much as 11% the minute you drive it off the lot. In the first year of owning your car, it can lose up to 30% of its value. This means a $35,000 new car is worth $31,150 the minute you leave the dealership and could be worth just $21,805 after owning it for a year.
New cars depreciate in value faster in the first few years you own it than a used car, and the Automobile Association finds a 60% depreciation in the average car at the end of three years and you can expect it to continue to drop at least 10% each following year. If you found a similar car, four years old, perhaps a former lease with low mileage, on sale for $26,000, the heavy depreciation has already occurred. At the end of your first year of ownership, it will be worth $23,400 — more value than if you purchased the more expensive, new car.
Downsize your utilities
You may not think you have any control over your utility providers but they are a business, just like retailers. In an effort to get your business, one electric company provider may offer a lower rate than another, and if you have been a steady customer of one provider, it may waiver a rate increase if you find cheaper energy from another provider and threaten to close your account.
The purchases that you make can have an effect, as well. Energy-efficient light bulbs, LEDs, for example, cost more than incandescent bulbs but have a longer life and use less energy.
Find ways to trim back, as every little bit helps. It sounds like something your dad would say but he’s right: throw on a sweater instead of turning up the heat when you get cold.
Ditch the gym
I’m not saying to skip working out and achieving a healthier lifestyle but your gym costs could be eating a large portion of your discretionary income. A gym membership, which comes with a 12-month contract, at $25 per month is $300 a year, not including joining fees (in major cities you can easily double that). I know, you’re thinking, “I can swing that,” but if 50% of new gym joiners quit within five months and have to fulfill their contract or pay a penalty — that’s like flushing your money down the toilet and gyms are banking on that.
Instead, get your workouts outdoors or use your money to invest in equipment you can use at home, which will pay for itself in the long haul.
Get your entertainment for less
Living beneath your means doesn’t mean you have to give up concerts, movies, and other entertainment; it means finding a new way to enjoy that entertainment. Sites like Groupon may offer entertainment specials like two-for-one deals. Movie tickets may be less if you buy them in bulk. And buying concert tickets from sellers who had to bail on a show last minute and sell on Ticketmaster or Craigslist could shave plenty of dollars off your entertainment budget.
At-home entertainment can be cheaper, as well, if you consider cutting the cord on cable and instead utilizing streaming services. For example, Comcast Xfinity charges up to $84.99 per month with its introductory offer that will expire in 12 months and can bump to over $100 per month when the year ends — $1,200 per year. However, Apple TV Plus charges $50 per year and gives you free streaming channels like NBC. And, if you are paying the cable company to rent your modem and router, roughly $11 per month, consider purchasing your own so what you are paying for eventually pays for itself.
Work a side hustle
If you find it too difficult to live below your means after creating a realistic budget, consider working a side hustle to give your income a boost. There are side hustles that you can do during your off-hours, many of them from home. And, if you consider the average annual raise is 4.6%, according to a Willis Towers Watson advisory firm survey, counting on a raise won’t give you the financial freedom a side hustle will: 4.6% of a $50,000 salary is $2,300 for the year while a side hustle of just $500 a month means an extra $6,000 a year.
What does living below your means actually mean?
To live below your means simply means spending less money than you earn (your “means”). If you are living above your means, this means you are living with debt — for example, using credit cards and carrying a balance, which forces you to pay interest. To live a life without debt is ideal for increasing your net worth, and if you do it right, living below your means can help you grow your finances and net worth.
Will you be scrimping and saving and not having any fun or purchasing things you want? Not necessarily. With financial goals and a budget, you can have the things you want — just as long as you don’t put it on credit. Living below your means is you taking control of your money rather than your money controlling you.
Living below, above, or meeting your means
To begin calculating your means, start with your take-home income — all income — and then tally your expenses.
- Are you living paycheck to paycheck and spending every penny that comes in? This means you are meeting your means.
- If you’re putting things on credit and spending more than you are earning, you are living above your means.
Financial advisors often tell young workers and future investors to follow the 50/30/20 formula. This equation simply means to not let your housing costs exceed 50% of your income, your discretionary spending does not exceed 30%, and you save the remaining 20%. The more you can save and the less you can spend, the more you will live below your means.
If you really need help with your money habits, consider hiring yourself a financial advisor. You can use the Paladin Registry to find affordable, reputable advisors near you.
Tools to help you live below your means
As I said earlier, you cannot live below your means if you aren’t watching where your money is going. Trying to keep track of it all can be tiresome, I know, I’ve tried setting a budget and maintaining it on my own. But I’ve found apps and tools make it so much simpler and keep track for me.
Here are some of my favorites.
- Chime is an online banking platform that doesn’t charge you fees to open an account and keep it managed each month. Nor is there a minimum deposit or balance required. You’ll be given a Visa debit card with your account and every time you use it your transaction will be rounded to the nearest dollar with the additional money going straight into your savings account.
- Radius Bank Rewards Checking rewards its members with 1.% cash back rewards every time you use your Radius debit card. You’ll need $100 to open an account but there are no minimum balance requirements, no monthly maintenance fees, and you’ll get unlimited automatic ATM fee rebates, which means you can use ATMs around the world for free.
- PocketSmith aims to “help people be more productive with their money.” Its tools track your finances with categories, labels, and reports connected to an automatic bank feed linked to banking, credit, and loan accounts so you can stay on top of your finances 24/7. The Basic version is free but it only allows for manual imports. For the automatic feeds, you’ll want to try the Premium version, which is $9.95 per month or $7.50 if you pay for the year in full.
- MoneyPatrol allows you to link your bank account to the platform, which tracks your spending and helps you to budget. Now you don’t need to keep a ledger and receipts to do it yourself. One especially cool tool offered by MoneyPatrol is if you exceed your limit, you’ll get an alert. So even if you aren’t reviewing your finances daily, the platform is. You’ll have a weekly and monthly summary, which will help you understand and change your spending habits.
Chime Disclosure – Chime is a financial technology company, not a bank. Banking services provided by, and debit card issued by, The Bancorp Bank or Stride Bank, N.A.; Members FDIC.
It may seem difficult to live below your means when you’re just starting out in life but now is the time to learn how.
As you make more money, you’ll already have the foundation in place for greater savings and investment opportunities and be ahead of the game in growing your wealth and living comfortably for the rest of your life.