It’s totally normal to want things you can’t afford, but it can damage your finances if you give into temptation too often. This is because it makes you start living above your means. Whilst it’s hard to admit that you don’t have the funds for a massive house or a brand new car, it’s essential if you want to start living below your means.
New releases of electronics, designer clothing and cars always try to tempt us to spend money on material things. Unsurprisingly, the average credit card debt in a U.S. household is over $17,000!
That said, in this article, you’ll learn how to create a financial plan to set yourself up for financial success and resist living above your means.
Why is it important to live below your means
Living below your means gives you financial freedom. Eliminating debt also enables you to save more money for unexpected costs or events such as a job loss. The job market continually changes, causing some careers to vanish and creating new opportunities.
Are you counting down the days between paychecks? This is a common sign that you are living above your means with no savings to fall back on. Financial uncertainty can be a worrying time, so it’s essential to start saving money, paying off debt and living below your means. It will prevent you from scrambling for cash or reaching for your credit card at the last minute.
How living above your means impacts your finances
Living above your means is expensive in many ways. You pay high amounts of interest on credit cards, you buy a car that straps your budget and impacts your credit score, or maybe even buy a house that is a bit out of your salary range despite what it may say on paper.
Just because it looks like you can afford it doesn’t necessarily mean you can if your situation changes. When you make a purchase, you need to consider the unexpected expenses that may accompany it.
Here are some examples of financial decisions that significantly impact your finances.
Being overextended due to a home purchase
When buying a property, you need to consider the costs of running a house.
Typical costs of homeownership include:
- Monthly expenses like your mortgage, utilities, rent, subscriptions, entertainment
- Insurance
- Maintenance and repairs
- Property taxes
- Heating/ventilation/air con systems
With all of the above considered, would you still be living above your means, below or within it? Knowing this before making a large financial commitment that you may regret later is a good idea.
Impulse purchases beyond your budget
Spending unnecessarily is one of the worst things you can do when it comes to living above your means. It’s way too easy to make unnecessary purchases on those high-interest credit cards when we see something we think we must have.
But then the credit card statement lands on your doormat. And when you don’t pay off your balance, you pay way more for that handbag than you think. Living above your means can create financial chaos.
Financing a car at a high cost
Using finance can enable you to own a better quality car than you may have been able to purchase with your own money. Perhaps you’ve wanted a new car vs. another used car.
Before you make this decision, you need to ask yourself, “can afford to make this regular payment for the contract term and still live within your means?” It’s also important to consider any fees or penalties you’d have to pay if you needed to end your agreement early if you could no longer make the repayments.
Signs you’re living above your means
When it comes to your finances, there are some key indicators to help you determine if you are living above your means. The sooner you identify them, the better.
1. You don’t have an emergency fund
An emergency fund is money that you put aside for unexpected events and life emergencies. The goal is to have at least 3-6 months of essential living expenses in a separate savings account.
Most people don’t have enough money in their emergency savings fund. This may seem hard to attain, but you can start with your first goal of $1000 and build from there.
2. You have credit card debt
Credit card debt is expensive. Especially if you have a higher-rate credit card. If you only pay the minimum, it can take years to pay off the balance, which can cost you thousands of dollars extra over time.
If you use your credit cards, it’s best to pay off the balance every month. You avoid paying interest and racking up debt by paying the balance in full.
3. You’re not saving at least 10% of your income
One of the best ways to save is by putting at least 10% of your income away every pay period.
For example, if you make $500 a week, you will save $50 every paycheck. By following this 10% approach you can quickly save up your first $1,000 for your emergency fund.
The benefit of this method of saving is that 10% isn’t a huge amount, so it’s achievable. If you don’t have any spare cash, look at where you can cut back in other areas and save that money instead.
4. You are purchasing big-ticket items despite your finances
Are you upgrading your expensive smartphone yearly or buying expensive designer bags on your credit card?
If so, you are definitely living above your means. The infamous saying “charge it” is a fast way to go into debt. If owning the latest technology or accessories is important, buy second-hand instead and save money that way.
5. You’re paying for expensive vacations you didn’t plan for
Everybody needs a break, but you aren’t living below your means if you aren’t saving money to take it and charging it instead.
Vacations are expensive and require effective budgeting to prevent going into debt. Travel out of peak season and search the internet for discounts before you book.
How to start living below your means
You’d be surprised how quickly you can learn to live below your means with the right budgeting tactics and finance resources.
With the right money mindset and frugal lifestyle, you will surely acquire the financial success you desire. Try out the following tips to get started.
1. Assess your current financial situation
If you don’t know the status of your financial health, you can’t improve it.
Write down all of your income and outgoings so you can see the entire picture. Don’t leave anything out, even your daily frappe! Categorize spending habits so you can easily see where your money is going and work out your debt-to-income ratio. All of the information you learn from this step is vital for step 2.
2. Make a budget
The first step to start living below your means is to make a budget. You need to determine how to create a budget that best fits your financial needs. There are a variety of ways to make a budget. Some popular budgeting methods are:
The important step is to use a budget method that is best for you and that you will stick to. Budgeting is a proven way to help you avoid lifestyle creep and unnecessary expenses, which happens when you increase your spending in line with an increase in income.
3. Create a financial plan
A financial plan is crucial for financial security. Creating a strong financial plan will help you attain your short term and long-term goals for your finances. Your plan will include:
- Your goals
- A debt payoff plan
- An emergency savings plan
- An investment plan
- Even an estate plan
You can either use a financial planning template or get creative and make your own. It doesn’t matter what it looks like, just that you can record and monitor your finances easily.
4. Curb your spending
The most effective way to start living below your means is to reduce your spending. You can save lots of money by not spending money on things such as coffee and clothes you don’t need, and dine out less.
Another way to save money is using cash instead of credit or debit cards. This makes you more aware of how much you are spending daily.
5. Live frugally
There are many tips and tricks to help you live a frugal lifestyle. You can purchase items preowned such as clothing, electronics, etc. Start couponing, save money at the grocery store, and buy in bulk to get cheaper items.
Downsize into a smaller home or apartment if needed and sell off items you don’t need for extra money. When you determine your needs vs. your wants, you start living below your means by being frugal with your spending.
6. Improve your money mindset
It’s all about perspective. Improving your money mindset can help you get a grip on your finances and stop anxiety caused by financial stress. Don’t focus on the negative. Use your past mistakes as a learning curve to make the adjustments to get your money right.
Rather than considering living below your means as a restriction, view it as the path to financial independence.
One of the most effective ways to live below your means is to increase your income. Having spare dollars left in the bank each month also acts as a financial cushion in case you’re faced with unexpected costs, such as needing to buy a new washing machine.
Whilst starting a side hustle is the most common way to make more money, you can also:
- Sell items you no longer need or use
- Invest in opportunities that generate passive income
- Work overtime
The more money you have to spare, the better your financial position is.
8. Utilize finance courses & resources
It’s easy to feel overwhelmed when you try to adjust your finances. We’re here to help you get on the road to financial success with our 100% completely free finance courses & resources!
You can use these courses and worksheets to help you through your financial journey and stay motivated every step of the way.
Expert tip: Consider downsizing your house
If you’re serious about living within your means, it’s time to start looking at your current living situation. Do you really need a three-bedroom property right now?
Just because the bank suggests that you can afford a $300,000 home doesn’t mean you should buy one. Downsizing and moving to a smaller house in a less affluent area is one of the best ways to start living below your means.
This way, you can enjoy being a homeowner without feeling like you’re being stretched financially each month. You’ll also have more money spare to pay off debt or top up your savings in the long term.
By how much should you live below your means?
The 50-30-20 rule is an easy-to-follow guide for figuring out how much you should live below your means.
50% of your monthly income should be allocated to paying for all your unavoidable expenses. This will include mortgage/rent, utility bills, groceries, transport and any debt repayments.
30% of your money can be used for funding your wants, such as eating out, holidays, entertainment and anything else that isn’t essential.
20% towards achieving your savings goals. Putting this money into a separate account is a good idea so you won’t get tempted to spend it on other things. It’s amazing how quickly your savings will add up!
If you use the proven 50-30-20 budgeting method to help you live below your means, you’ll have more control over your finances while still enjoying life and spending money on the things you want. Keep in mind, you can adjust the percentages to suit your needs accordingly e.g. 70-20-10 or 60-20-20.
What are the practical tips to live below your means?
Living below your means doesn’t mean you have to stop spending money on things you enjoy. It means knowing how to make good financial decisions.
Here are three practical tips to help you achieve financial success.
Use cash
Suppose you struggle to resist using credit to pay for things. Using cash instead is a great way to stop living beyond your means. It may not be the easiest way to pay for things, but it will stop you from spending money you don’t have.
Regularly monitor your progress
Sometimes, it can take time to change bad financial habits, and that’s okay. The important thing is that you’re making progress toward your goals and that you stick to them. Regularly checking how far you’ve come is a great way to stay motivated and on track.
Work on your self-discipline
The key to successfully living below your means is to avoid temptation and instead focus on your self-discipline. It might be difficult, but we promise it will be worth it! In two years, you’ll be so glad you said no to all those clothes you didn’t need.
What are the advantages of living below your means?
When you live below your means, or at least live within your means, you stop living paycheck to paycheck. This means that your financial health improves greatly.
Here are five reasons to stop living within your means and start living below it instead.
Become debt-free sooner
Spending less money in certain areas allows you to allocate more earnings to pay off debt. The more you pay off, the less interest you will pay, reducing your overall debt. Being debt free may even enable you to retire earlier!
Improve your credit score
The less debt you have, the better your credit score because it lowers your credit utilization rate. A healthy credit score can allow you to save money in the long term as it gives you access to better car insurance rates and lower-interest mortgage deals.
Fewer money worries
When you know you have spare money in financial emergencies, you stop having sleepless nights worrying about how you will pay for things. This is a great position to be in and one that many people strive for!
Build savings faster
Living below your means can give you the financial flexibility to save more money, allowing you to reach your savings goals and build up your retirement nest faster. Once you’ve smashed your current target, it’s time to start planning another one!
Financial confidence
To live within or below your means, you must understand your finances. Budgeting is the best way to do this. Once you know where your money is going, you will find it easier to make smart financial decisions.
You can live below your means!
With the right money mindset, budgeting methods, and financial planning, you can quickly begin to live within your means. You can even make it fun by participating in a money savings challenge and maybe get a friend to join you to help each other stay accountable.
Start living below your means and see that bank account start growing faster than you think!