Living below your means isn’t just about cutting costs and saving money. It’s about taking control of your money, so it doesn’t control you.
When you live below your means, you have the power to coolly handle an unexpected car repair or medical bill, save for retirement and fund your dreams, whether that’s a Craftsman-style house or launching an Etsy business.
A good rule of thumb is to live on at least 15% less than the amount you earn. Here are our best tips for how to live below your means without feeling like you’re missing out.
Create a plan for your money
The act of assigning a job for every dollar can be empowering. The popular 50/30/20 budget divides money into the categories of needs, wants, and savings and debt repayment.
“Make financial choices for the month in the quiet of your own head, or with your partner, in advance — not in the moment. That way you can feel great about your spending,” says Charlie Bolognino, a certified financial planner in Plymouth, Minnesota.
Save off the top
Divert money from each paycheck before you’re tempted by it. Once you start, it becomes painless to save through 401(k) paycheck deductions at work, or automatic monthly transfers to a savings or investment account.
When you finish paying off something, whether a smartphone, car or college education, continue making the same monthly payments you’re accustomed to — but direct them to yourself. Stash the money in an interest-bearing savings account, and let it accumulate. The next time you want to buy something, you can pay cash — and feel the opposite of deprived.
Live off one income
Many dual-income families naturally budget their lifestyles based on money that two jobs bring in. But consider the benefits of making a conscious choice to live off just one salary. If it’s possible, arranging your household costs so just one person’s pay covers the bills provides significant financial freedom.
“Arranging your household costs so just one person’s pay covers the bills provides significant financial freedom.”
Earmark the second paycheck for maxing out retirement savings, investing or paying off debt. It also provides flexibility for life events like an unexpected job loss or having one parent stay home with young children for a time.
Cut meaningless expenses
Are you eating out too frequently, subscribing to boring cable channels or paying for unused memberships? Eliminating costs you don’t care about frees up money for things you truly enjoy.
Try this: Write down what you value in life. Then look closely at your last few financial statements. Do your purchases match your values?
Right-size your home
Hold back from buying the most expensive house the bank says you can afford. Instead, buy the small fixer-upper and make the house your own, says Diane Manuel, a certified financial planner in El Segundo, California. That way you can enjoy your nest without feeling stretched by the costs of homeownership like taxes, insurance and maintenance.
Do you really need that brand-new car that loses 20% of its value as you drive it off the lot and comes with a $500 monthly payment? Purchasing a previously owned car, and paying cash, means you skip the stress of an auto loan on top of other expenses of car ownership.
“Remember, your car is only transportation. Used cars from rental agencies are good” to buy, Manuel says — “low mileage and under warranty.”
Pay less interest
If you carry balances on high-interest credit cards, consider consolidating your debt to save on interest. With good credit, you might be eligible for a balance transfer credit card at 0% interest for 12 months or longer. Just watch out for transfer fees, and transfer only an amount you can afford to pay off before the introductory period expires and the rate jumps.
Or refinance with a low-interest personal loan from a credit union, bank or online lender. With less interest to pay, you’ll be free of debt and on to other meaningful goals faster.