Budgeting

Living Below Your Means and Saving Money

You may have heard the financial phrase, “Living below your means.” But what does it mean to live below your means? Spending less money than you earn is the key. Are you searching for ways to stop spending money and start saving? Learn how to start living below your means to keep more money in your pocket!

4 Steps To Start a Household Budget

Following a budget plan can help you stop spending money and start living below your means. But creating a household budget is the hardest part. There are various ways to budget your money, but you need to know exactly how much you earn and how much you spend on monthly expenses.   

Step 1: Calculate Your Monthly Income After Taxes

To budget your money accurately, you must know how much you bring in each month. If you receive paychecks, document how much you earn after taxes and employment benefits are withdrawn. Do not forget to include additional income from side hustles.

If you do not have a steady income, gather payment information for the past six months using invoices, bank statements, government award letters, etc. Make a list of how much you earn each month and add up the total. Divide your income for the past six months by six to get your average monthly income.      

Step 2: Calculate Your Monthly Expenses  

To get an accurate list of your monthly expenses, look at your monthly bank and credit card statements. Make a list of every withdrawn amount and separate your expenses into two categories: essential and nonessential. Essential living expenses include housing costs, food, utilities, debt payments, etc. Unessential expenses are costs that can be cut or postponed. Once you have your two expense lists, calculate how much you typically spend on both.      

Step 3: Pick a Budgeting Method  

Following a budget plan can help you live below your means and obtain more financial independence! Once you know exactly how much you earn and spend on average each month, you can start budgeting. The best budget plan depends on your financial goals and what expenses you want to prioritize. Take a look at four common budgeting methods below.   

Zero-Based Budgeting (ZBB)

Zero-based budgeting is ideal if you earn an irregular income. If you want to start living below your means, know that zero-based budgeting, or zero-sum budgeting, helps you categorize spending. Hence, every dollar is trackable and used for a specific purpose. Unlike a traditional budget, zero-based budgeting does not allow you to have any extra money in your checking account. 

Any extra money you have should go towards one of the following:

  • An interest-bearing savings account
  • An investment account
  • Debt repayment 
  • Retirement savings

To start a zero-sum budgeting plan:

  1. Make a list of categories to determine what you spend your money on every month.
  2. Include categories for financial goals, such as a new car or tropical vacation.
  3. Take a look at your checking account and determine how much money will go toward each category.

The benefit of zero-based budgeting is that you do not have to rely on your next paycheck. You can budget using existing money in your bank account.      

The Envelope System

It is entirely possible to start living below your means and save $5,000 using the 100 envelope challenge. The envelope system requires you to use cash exclusively. Having physical access to your money makes you hyper-aware of your spending. Knowing how much cash you have can help you make better personal finance decisions to save more money.  

You will need 100 envelopes numbered from one to one hundred. Every day, grab one envelope at random and put cash inside. If you get an envelope labeled as 20, you would deposit $20 inside and store that envelope in a secure location. Keep saving until you run out of empty envelopes! You can then take all your envelopes to the bank and open an emergency fund. 

The 50/30/20 Budget

The 50/30/20 method divides your monthly income into three categories. Each category is worth a certain percentage, and you should not spend more than necessary on any category. 

  • Needs (50%) – Towards necessary expenses you absolutely must pay.
  • Wants (30%) – Towards unnecessary expenses that are not essential.  
  • Savings (20%) – Towards an emergency savings account for unexpected expenses.        

As shown above, you are meant to spend up to a certain amount on various financial categories. You can adjust the 50/30/20 budget plan if you spend more or less on necessary expenses. If you want to prioritize financial freedom, you can increase the amount you spend on debt repayment. Paying more money towards loans and credit card debt each month can help you achieve financial freedom faster.     

The Pay-Yourself-First Budget

The pay-yourself-first method is straightforward and doesn’t require any math calculations. You use your money to pay necessary bills first and then spend the rest of the money on anything. If you aim to live below your means, ensure you focus on paying back your debts. Being debt free allows you to achieve financial security because you do not have to worry about paying back a lender or credit card company. 

Step 4: Track Your Progress  

Once you decide on a budget method to follow, tracking your progress is crucial. You can use a traditional budget worksheet or download a budget tracking app. To ensure you always know where every dollar goes, update the worksheet or app regularly. If you go out with friends, keep all your receipts or carry cash to avoid overspending.  

What Should You Spend Money On?

It would be best to cut expenses when trying to live below your means and save money. But what should you actually spend your money on? In order to live a fulfilling life, you need to spend money on more than just basic expenses. But what purchases are worth the cost?

Personal Development

Personal development is essential, so ensure your money helps you become the person you want to be. If you are interested in learning how to express yourself creatively, consider signing up for art classes or learning a new instrument. Learning a new language can improve your confidence and desire to travel. Take time to consider how you want to grow as a person and what you want to achieve.    

Your Physical and Mental Health

Your physical and mental health should always be a priority. You can invest in healthier foods, exercise classes, and therapy to maintain your health. If you spend money on a gym membership and actively go, that is a justified and necessary expense. However, if you only use the same two machines, consider switching gyms or opting for a cheaper membership.   

Your Financial Future

Investing in your financial future is crucial if you want to live below your means. If you don’t already have a savings account, it’s time to open one and start making deposits. Having debt means you are wasting money on interest fees, which can equal hundreds or thousands of dollars yearly. Paying more than the minimum payment on your monthly debts can help speed up the payoff date. Having little to no debt can help create a more stable financial future. 

Your Children

If you are a parent, you know that investing in your children is a must. Money should always go toward your child’s welfare, education, and personal growth. You do not have to spend much money to provide your child with a happy childhood. As long as you spend time with your children and engage with them, you can help them grow into well-adjusted people. Most major cities have free programs and events for kids throughout the year. Don’t feel compelled to budget a large portion of your income on entertainment.   

How To Stop Spending Money on Unnecessary Expenses?

The best way to live below your means is to stop overspending, but that’s easier said than done. How do you stop if you are used to spending more than you should? 

The best way to stop meaningless spending is to follow a budget plan and reduce the amount you spend on various items. 

Reduce Spending on Food

Eating out costs a lot of money, but it’s convenient, which is why many people overspend. But cooking does not have to be a chore. Cooking for yourself is an accomplishment, and you can save a lot by preparing meals at home. When you go grocery shopping, look for weekly deals or coupons. Most large chain grocery stores have apps that allow you to clip coupons easily. Opt for happy hour specials and low-cost options if you go out to eat. 

Reduce Monthly Bills

Reducing your monthly bills can help you live below your means. If you rent or own a house, reduce your energy and water consumption to avoid high utility bills. Although car insurance is required in many states, you may be able to get a lower rate by switching insurance companies or participating in a safe driving program. If you have a lot of TV subscriptions, consider cutting them and switching to free options like Peacock or Freevee.      

Pay off Credit Cards and Loans

If you have a loan or credit card debt, you are currently losing money on interest fees! Even if you applied for a small online cash advance loan, you would likely have to pay a hefty interest fee. To get more money in your pocket and start living below your means, prioritize repaying your debts! Once debt-free, you have more disposable income to save or spend on yourself. 

The Bottom Line: Living Below Your Means and Saving Money

Are you currently living paycheck to paycheck? Do you want to start living below your means? Reducing your spending and budgeting your money makes it possible to attain your financial goals! Once you can reduce the amount you spend on living expenses, start an emergency savings fund to protect yourself in the event of unexpected expenses. You can track your financial progress by using a budget tracking app or printing a budget planning worksheet.

References:
How to Avoid Overspending Each Month│Experian