Why is spending less than you earn so crucial to building wealth? When building wealth, people have often said you need to live below your means. Living below your means is something that is emphasized through a lot of financial publications. You have to be able to live on less income. I know that can sound not easy to some, but it is essential to make sure you can achieve wealth.
As JL Collins would say, “spend less than you earn.” There are two ways to make more wealth. First, you can make more money and play offense with your finances, and secondly, you need to cut costs and play defense. That is where living below you means comes into play.
What is Living Below Your Means?
Living below your means is when you spend less than you earn. So if you make about $3000 per month and pay only $2000, you live below your means.
This is an excellent concept in trying to achieve more wealth. Living below your means is a part of personal finance that is talked about everywhere. Being able to spend less than you earn is part of how you can have a high savings rate. With your high savings rate, you will then be able to invest more money for your future.
It would help if you learned how to do your best and not allow lifestyle creep to happen.
What is Lifestyle Creep?
Lifestyle creep is when you start to spend at the level of your income. When we increase our incomes, sometimes we begin to grow our spendings and stop living within our means.
This is the opposite of what we should do. As we increase our incomes, we should keep our spending either the same or continuing to cut if is necessary.
As we spend more and more money, we have less money to build our wealth. The savings we have goes on to the investments we can make for our future.
Why is Living Below Your Means Important?
Living below your means can provide excellent value to your life. Not only can it help you build wealth, but it can offer other great benefits to your life as well. You are able to make long-term goals like saving for retirement or even being able to manage your money every month.
Less Stress
As we spend more money, stress becomes a more significant factor in our life. Higher credit card bills, higher payments towards a car and a house can impact our mental health. At the end of the month, we need to see how much money is left. If there is none left stress can creep in.
If you were to lose your job, but you have a high spending mentality, then the added stress from all the bills that will come knocking at the door can be detrimental to your health.
If you live a frugal life and live below your means, you will have a financial plan and a cushion in times of trouble. The sudden loss of a job will not create unneeded stress. You will then be able to save money instead of spending money
During the pandemic, people started to save more. Their savings rate went from 7% to 13%. People started to cut costs in case their jobs were to be lost.
As we encounter financial hardships, then we need to have a plan to combat them. We need emergency savings, better spending habits, and money left to encounter the hardships.
Being able to continue to live below your means gives us the needed cushion to weather any new storm that may arrive.
Create Greater Bonds with People
Money is a sore subject with people. It is also a massive cause of relationships with loved ones to be broken up. As we spend more money, more stress is produced and passed on to our loved ones.
As we live a more frugal life, we can appreciate the good things in life at a lower cost. Life is not meant to spend 100% of your money every single week, waking up having nothing in retirement.
Living below your means can help to strengthen your relationships. These can be relationships with your partner, family, and friends. We can be more generous with our money as well.
Being generous can be a way of creating and enhancing relationships as well. Money cannot buy happiness, but it can be a gesture to help those people around us.
Hitting Our Financial Goals
As we live below our means, we can hit our financial goals quicker. The difference of saving an extra 5-10% of your income can be a difference of years to hit our financial goals. A reasonable savings rate can go a long way.
As we strive to hit our financial goals, we need to be able to save more money. One way to save more money is to live below our means. It is a huge driver in our potential for wealth.
If I were to save 10% of my income, it would take me around 51 years before retiring. Now, if I moved that to 15%, then I can hit retirement in 43 years. Just 5% of extra savings saved me so much time.
Mr. Money Mustache wrote a blog post called The Shockingly Simple Math Behind Early Retirement. With this post, he points out just how simple it is to reach our financial goals by saving money and cutting some costs. Being able to cut your spending is much more powerful than increasing your income.
An Example for Living Below Your Means
My wife and I make roughly $60,000 together. This may not be much money in parts of the world, but it is pretty good.
If we wanted to, we could have a massive apartment that costs like $15,000 a year. We could spend lots of money going out to eat and buy many expensive things to fill our lives.
We would not be so happy. There would be significant stress in our lives from too much clutter. The fact that our apartment is so expensive can bring on even more pressure. Our relationship may become a bit toxic because of the added stress. The financial goals of traveling and saving for our retirement will be put on hold.
What we do instead is live below our means. We try to budget close to $13,000-$15,000 a year on living expenses. Our savings rate is around 60% or more, and we use our savings for our future travels and for hitting Financial freedom.
Living below our means gives us peace of mind. We cannot stress about money. If a sudden loss of a job were to happen, we could survive and pick up a side job until we find a better permanent job. Life continues to go on since we did not allow our spendings to get out of control.
Here are 3 Ways to Help you Live Below Your Means:
1. Track Your Spending
If you do not know where your money is going, then you are likely going to overspend. The time is now to start tracking every dollar.
A dad I know is trying to teach his children about spending and budgeting. Every time they spend some money, they will write it down in a spending journal. This is a way to show them how spending money can accumulate quite quickly.
Tracking your spending is very important. You can look at the end of the month and see what you are spending money on. Then you can cut the things that do not bring value to your life.
2. Create A Budget
It is time to create a budget. The budget can help you organize where you would like your spending to go.
Budgeting helps us make plans for our future. As we plan, we are making changes in our lives to achieve the goals we set out for ourselves. Each time we can save some money, it allows us to grow our money for the future.
3. Pay Yourself First
People may say pay yourself first as a way to invest more. It is also a way to live below your means. If you set up automatic payments to a savings account or investment account at the beginning of the month, you will not be able to touch that money.
This helps us in living below our means. The ability to take a certain amount of money out of our pocket will give us the ability to live on less. If we can live on less then, our habits will be changed. The change in practices will create a new sense in us to live better lives on less money.
How Does Living Below Your Means Create Wealth
Being able to live below your means is a great way to save more money. The savings bit will help create more wealth for you through investing.
The Power of Investing
As we save more, we can invest more. The power of investing money cannot be overstated. People believe that investing is risky. It is probably riskier to leave your money in the bank than to start investing.
Investing is not easy. It may be simple, but I cannot say it is easy. Human psychology gives us the emotional highs and lows of gaining money and losing money. So investing should be a long-term plan. Through compound interest, you will be able to increase that amount of money.
If you are new to investing a great place to start is investing in index funds. If you choose an index fund that tracks the total stock market, then you can match the returns. For the last 100 years, the market has returned on average around 10%, but being a little conservative, just think about increasing around 7% with a 3% inflation rate.
When you put that money into these investments, make it simple by automating it, and don’t touch it. This will help you create lots of wealth and a passive income stream. Index funds have some of the lowest costs out there as well. Take advantage and start investing now.
Invest Simply with M1 Finance. You can easily set up a 3-Fund portfolio and automate everything. Get $30 when you deposit $100. Make life simpler.
The Benefit of Living Below Your Means:
As we conclude, it is nice to think that living below your means can supercharge your finances.
You can live life with less stress. The money you save can help create more money through the power of investing. The ability to move anywhere because you don’t spend much is a huge plus.
As you look at your life, see what you can do to live below your means. Track your spending to see if what you spend genuinely lines up with what you value. Make critical decisions to help supercharge your finances.
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” Spend less than you make, stay out of debt, and invest the rest”
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.
I just have no idea how people live above their means. I spend something like $20k ($25k normalized without COVID) a year and it would take so much brainpower, effort, and attention in order for me to spend triple or even quadruple that.
It’s such a great thing to live below your means. Once you’re used to it, you can practice self control much more.
I agree David! I have seen people talk about if they spend above their means then they need to make more money. I think making more money is good, but living below your means can supercharge your wealth. You are spending less and can invest more. I cannot think about spending more than I make. It is hard to fathom.
You will certainly never be rich if you go out and spend all of your money. It takes emotional stability to decide to save your money. Most people would rather look rich than be rich
That is the truth. That is also that hard part of personal finance. People feel that if they have money they should spend it. It is never the thought of saving it for a rainy day or even investing it for your future. Looking rich is over-rated.
It really doesn’t take much to live below your means. My wife and I always have and that is largely how we “Accidentally Retired” – we may not live off $20K a year like David, but when we were making $35K a year, we were still saving as much as we could. This allowed us to buy a house at 24 and pay for 1/3 of our wedding.
Then when I was making over six figures it was easy to live below our means. If you make it a practice from the start, it’s not hard at all. It is the surest path to building wealth.
The amazing thing is how we can make good habits that last a long time. My wife and I live in Taiwan and therefore we can save more money. Living below our means is spending about $1200-1300 a month, which is around $15K a year. David is doing pretty well on $20K in the states, and you are doing well yourself. Those good habits continue and as long as you do not let the lifestyle creep happen you can build wealth super fast.
Great article Steve, as usual.
I’m wondering what % income increase you would allow a controlled lifestyle creep at or do you envisage as static as possible for a long time?
I think it depends on your salary income. If you can keep lifestyle creep to a minimum then that helps you save more. If your salary increases by 50%, then you can increase your spending a little, but still, try to stay frugal. Once we get accustomed to spending more, we will want to continue that lifestyle. It is harder to cut expenses than it is to increase expenses.