Are you one of the 56% of Americans who are living paycheck to paycheck? With the $1.9 trillion American Rescue Plan in full swing, it’s clear that the pandemic has caused significant financial problems. 35% of respondents to a Travis Credit Union study claimed that they had spent more than they earned during 2020, with only 2% feeling confident about the state of the economy.
The problem is that this period of our lives can harm our financial future. If you’re hoping to reach financial freedom one day, then you need to be living below your means right now to make this happen.
Follow this guide to explore the benefits of living below your means as well as the strategies you can follow to reach your financial goals.
Is it good to live below your means?
Let’s start by making sure we’re all on the same page about what living under your means, erm actually means.
Essentially, a live below your means definition is NOT living paycheck to paycheck.
Instead, you’ll spend less than you earn each month so that you have some money set aside to help you reach your financial goals.
The alternative is to get into debt to afford your monthly living expenses, which can lead you into a hole that is very hard to get out of.
Not to mention the fact that spending money is simply handing over your hard-earned cash for someone else to become wealthy from.
If your monthly cash flow is negative you should consider changing your mindset entirely to hang onto your finances to increase your net worth.
The benefits of living below your means go further than your financial position too. If you experience anxiety related to money, or if you find that it’s a source of arguments within your relationship, then living under your means can completely eradicate this worry.
This is particularly important if you live in a household with children who can pick up on your anxieties related to money.
But wait, doesn’t retail therapy give you a boost? Unfortunately, the buzz you might get from buying something shiny and new is often short-lived and is quickly replaced by the guilt and stress of not being able to afford the purchase.
On the other hand, scientific research proves that having something to look forward to, such as a vacation you’re saving for, can have a positive effect on your brain chemistry.
By building anticipation over the long term, you’ll enhance both your experience at the time, but also the period leading up to it.
This means that saving your money up to put towards a future goal, can help to release those feel-good endorphins.
As we’ve already established, the best way to save money is to live below your means.
And we’re here to show you how to do just that.
How do you live under your means?
If you’ve read our reasons to live below your means closely and are ready to commit, then you might be wondering what steps you need to take and how radical they are.
After all, we all want to live a comfortable lifestyle that allows us to enjoy ourselves once in a while.
So, does living under your means require a total switch to frugality with little in the way of luxuries? Not necessarily.
Living below your means usually boils down to just being a bit more sensible with your spending.
But as we’re all experiencing the impact of the pandemic in some way, how do you live below your means in 2021? Here are five living below your means tips can you can follow this year.
1. Spend less often
Budgeting should be a top priority, but before you start focusing on the numbers, one helpful trick is to consider not just how much you’re spending, but also how often.
If you are a habitual spender, you might grab a coffee on the way to work, perhaps a takeout for lunch, a quick Amazon purchase on your iPhone, and a couple of drinks after work with a friend.
So, on top of your weekly bills, you’re completing four or five needless transactions per day? Try to cut back to just one or two things you need and take your time before making any purchases online.
If you’re prone to adding things to a digital shopping cart, it can be helpful to take a step back, wait a few hours and check if you feel just as compelled to buy them later on.
2. Sticking to a budget
The concept of living beneath your means is different for every person because of course none of us have the same wages vs expenses to balance out.
So before you work out how to live under your means, it’s worth creating a how to live below your means budget to use as a template towards your goals.
Gather your payslips, your bank statements, and details of your energy bills and work out how much of your wages should be set aside for expenses each month.
From here, you’ll know how much you have left to spend on luxury items and entertainment.
The trick here is not to spend all of it, but rather set some aside to put into savings, or pay down your mortgage faster to achieve your long-term financial goals quicker.
3. Working together to achieve an affordable lifestyle
Whether you’re a single earner supporting a family or are running a household on a dual income, your partner and dependents must be on board with living below your means.
It can be next to impossible to stay on track if you have a strategy in place but your spouse or children are continuing to spend excessively.
Communication is key here, so sit down with everyone concerned to make sure you’re all on the same page.
4. Cutting back on the largest expenses
What are your biggest outgoing expenses each month? For many people, these will be the price of keeping a roof over your head (your rent or mortgage payments) as well as the cost of running a vehicle.
In each of these cases, it’s worth making some big decisions about how much you’re willing to allow them to eat into your overall budget.
It can be challenging to live under your means if your rent is 50% of your paycheck for example.
Most people will spend 20% to 40% of their pay packet on mortgage payments, but imagine the difference between someone who only needs to pay 20% vs someone else who pays 40%.
This may be worth it in the long run if it means you pay down your mortgage debt faster.
But if you’re taking out a larger mortgage to afford a larger home because interest rates are low now, check that you would be comfortable if rates were to rise suddenly.
One of the greatest frustrations of a car owner is how quickly your set of wheels loses money.
You can expect a new car to lose around 20% in its first year, which puts you at risk of selling a car for less money than you still owe on it.
Opting for a more economical model and paying it down quickly over the short term could work for you.
5. Setting aside cash
If you receive a bonus, a tax refund, some inheritance, a lottery win, or any other unexpected income, it can be tempting to spend it all. But if you’re committed to living beneath your means, then it’s best to set aside at least 50% to put towards your future. You might choose to add to your pension or knock a little extra off your mortgage.
Are you ready to start living below your means? It’s easier than you think to take simple steps which will have a fantastic impact on your finances. For further budgeting advice to help you achieve financial independence, please check out The Finances Hub blog today.
