Many experts will tell you that to get rich, you should live below your means. That is, spend less money than you earn. Sounds simple enough. But this advice holds true, whether your income is $25,000, $50,000, $100,000, or $1 million a year.
Of course, it is easier to live below your means if you earn $30,000 as a single person with no dependents, than if you earn $80,000 and have a spouse and two children—one of whom is entering college next year. But whether you are young and starting out, have a lot of responsibilities on your plate, or just received a hefty bonus or raise, it can be useful to examine your standard of living compared to your income level.
One truism about American life is that we are frequently told how we can be happier and more successful by spending money on things. Through the internet, television, signs, magazines, and newspapers, we are bombarded with advertising messages that encourage us to spend money.
The truth is, people who overspend on material things tend to feel anxious and miserable, while people who live below their means tend to feel secure and happy. Of course they are. They figured out how to get rich slowly.
How do you know if you live below your means?
Obviously, if you routinely run out of money before the end of the month, you are living above your means. But there are other telltale signs you are spending more than you make:
- You don’t pay off your credit card balance every month. Every. Single. Month.
- You don’t have at least three months living expenses in an interest bearing savings account.
- In addition to three months living expenses, you don’t have a “reserve” to pay for irregular, but expected expenses such as a new winter coat, annual insurance premiums, or holiday expenditures.
- Your mortgage (or rent) is more than 25 percent of your take home pay.
- You don’t put 30 percent of your take home pay in savings.
- Your essential living expenses exceed 50 percent of your take home pay.
Essential living expenses include total housing costs, transportation, food, clothing, and health or medical expenses. To live below your means, your essential living expenses should require no more than 50 percent of your take home pay.
Only 20 percent of your take home should be spent on “extras”. Extras include smartphones, entertainment, dining out, home services, personal services, vacations, and any other non-essential indulgence. The rest, 30 percent, should be put away in savings, for your living expenses cushion, your “reserve” for irregular expenses, and retirement. It makes sense, doesn’t it? We want to spend the last one-third of our life in retirement. So it only makes sense we need to save one-third of our income.
Trimming relatively small expenses such as lattes, magazines, and gym membership is a common approach to reducing expenses. But to get rich, you need to learn how to live below your means. To do this, you need to examine your essential living expenses.
Essential living expenses
The biggest essential expenses most of us have are housing and transportation. Most Americans living above their means do so because they spend too much on these two items. Other essentials include food, clothing, and health or medical expenses.
What follows are some suggestions for reducing all of these essential items.
Total housing expenses
Depending on who you ask, experts recommend that total housing costs should require only 20 to 25 percent of your take home pay or 28 to 33 percent of your gross pay. Total housing costs includes not only your mortgage or rent, but also utilities (gas or oil heat, electricity, water, sewer, and garbage), basic phone service (to call for emergency services), and homeowner’s or renter’s insurance. If you own your home, total housing expenses also include real estate taxes and an allowance for maintenance and repairs.
The homeowner’s maintenance and repair allowance needs to cover unexpected expenses, such as plumbing repairs for a broken pipe in winter, as well as expected costs to maintain your home. Big ticket maintenance items include a new roof, on average about every 25 years, and re-painting the house every 5-10 years. Other smaller expenses are replacing appliances as needed, such as the hot water tank, furnace, air conditioning units, refrigerator, dish washer, and washer/dryer. Plus any other house (and yard) maintenance costs. A maintenance budget between one and five percent of the value of your home, set aside annually, is a reasonable estimate.
For example, if your home value is $200,000 then you need to set aside between 2,000 to $10,000 per year, or $167 to $833 dollars per month. The lower number applies if your home is newer and you live where the conditions are agreeable. Increase the percentage by one to two percent if your home is more than 10 years old. Increase the percentage again if you live where there are adverse conditions that may create additional expenses. Adverse conditions might include severe winters, a potential for flooding or fallen trees, insect infestation, or other conditions depending on where you live.
If you are thinking about buying your first home, pay close attention to these numbers.
Average car ownership in the U.S. costs around $8,000 per year. You can lower the cost of vehicle ownership by buying an economy model, never buying a brand new car, buying a used car that is at least two years old, and keeping the car for at least six years (preferably longer, eight years or more). It is usually less expensive to maintain an old car than it is to buy a newer car. My 2007 (paid for) vehicle costs me about $2800 a year to operate. I don’t plan to trade it in any time soon. It runs great and I keep up on maintenance.
Some families reduce transportation costs by only owning one car. When they need a second or larger vehicle for a special need, they simply rent one. There are also less expensive transportation vehicles to consider, such as a motorized scooter.
Some cities have good public transportation that is much more economical than owning a car for routine trips such as getting to work. Still other cities and towns have walkable neighborhoods with good stores and services that reduce the need for routine car trips.
Your ability get by with fewer or no cars, or use alternative or public transportation is often dictated by where you work and live. If you are considering a change to your housing situation, be sure to examine transportation options as well.
Cost of food
The more convenience products (packaged or prepared foods) you buy, the more you will spend on food. It’s that simple. To really save on food, get back to basics. Eat simple foods such as oatmeal for breakfast, homemade sandwiches (wraps or pizzas, if you prefer) with a piece of fresh fruit for lunch, and one-pot dinners such as hearty soups, stews, and stir-frys. These are dishes where you can maximize the use of bulk grains and seasonal vegetables, while limiting the portion of expensive meat.
As much as possible, buy seasonal produce, “seconds”, foods in bulk, or generic and store brands. But, be mindful of what you buy in bulk. By only what you can use. Five pounds of cheese or a gallon of marinara sauce that goes bad before you use it does not save you money.
For packaged products you do buy (from applesauce to tomato sauce), clip coupons if you have a lot of time to devote to the practice. Better yet, learn to cook from scratch. Following the advice above, you don’t need a recipe for oatmeal or sandwiches. So you really only need a few basic recipes for soup, stew, and stir fry. Then just vary the ingredients seasonally or according to what you can buy cheaply in any given week.
But what about chips, sodas, snacks, and desserts? Ah, these non-essential items should not come out of your food budget, they should come out of your budget for “extras”.
There are a couple of different approaches to saving money on essential clothes.
One is to buy high quality garments that don’t go out of style (and don’t wear out). Buy them on sale, at discount stores, or second-hand stores specializing in “curated” high-end labels. Pay attention to cleaning labels. For garments that need to be dry cleaned, you will need to budget for that expense in order to get the most value from these clothes. But well-made, classic garments can last a lifetime.
Another approach is to buy essential pieces that are all mix and match, washable garments. To extend the wearable life of washable clothes, don’t dry them in a dryer or don’t dry them completely. Instead, hang them until completely dry. (This also saves utility costs by running the dryer as little as possible.)
For either of these approaches, you might also consider building a minimalist wardrobe. Now, this is not some magic number of pieces, like 10 or 20. It’s about defining your style and your needs and then carefully buying only the garments that work for you 100 percent of the time. For someone who works at home or lives where the climate is consistent all year long, 10 pieces might work; while someone in a corporate office with a professional dress code or where there are extreme seasonal climate changes, might need a closet with 50 pieces. The point is, you should only spend money on clothes you need and wear consistently. If you have a closet stuffed with clothes and nothing to wear, because you succumb to trends and impulse buys, consider a revamp to a minimalist style.
Health and medical expenses
If you are generally healthy, then stay that way by eating a balanced diet, getting enough exercise, and allocating some of your budget for services that will help you stay healthy. These expenditures might include a fitness class, preventive health measures such as massage or acupuncture, as well as a routine physical checkup with your physician from time-to-time based on your age and activities. If you have health insurance, be sure to maximize your use of this benefit.
More tips for living below your means
These are some behaviors you need to adopt immediately in order to begin to live below your means:
- Create a budget using actual numbers (mortgage, rent, utilities, food, etc.) and stick to it.
- Eliminate debt. You can’t live below your means if you have debt. Especially do not take on debt for essential living expenses (other than a home mortgage). Ever. You are living above your means. If you have debt, pay it off. Once it’s paid off, vow never to take any debt on again.
- Do not use credit if you can’t afford to pay the credit card bill in full when it is due. If you don’t have the cash for something, you are living above your means.
- Avoid unnecessary fees: late fees, bank fees, bill paying fees, check cashing fees, and ATM fees.
- Resist the trend to be “upwardly mobile”. When you get a raise, do not increase your standard of living. Over 1 million millionaires live in homes valued under $300,000, according to Thomas J. Stanley, author of “The Millionaire Next Door.
- Track every penny you spend. Compare actual expenditures to your budget. If they don’t match, and expenses are over budget, get to work. Negotiate fees or cancel services. Reduce expenses or get a second job, or both.
- Think long term. Don’t spend today. Save for tomorrow.
Finally, here are some additional tips for living below your means. Keep these in mind especially when you are tempted by commercial messages or the urge to “get happy” by spending money:
- Don’t “want”. Don’t want anything. Don’t envy others. Don’t try to keep up. Be satisfied with what you have. Choose to be happy where you are.
- Don’t go to the mall. Read. Exercise. Call a friend. Visit with family. Review your budget. Clean. Anything. Don’t go to the mall.
- Act like you have no money. When tempted to spend impulsively, simply remind yourself you have no money.
- Remove cash and credit cards from your wallet. Plan all shopping or spending trips in advance and take only the money you need. If you are using a debit card, make a list, buy only what is on it, return home, and remove the card from your wallet again.
- Pay special attention to impulsive behaviors: tossing something extra into your shopping cart that’s not on your shopping list or “splurging”, whether it’s a “just a latte” or an expensive piece of clothing you want.
- Instead of buying something, check whether it makes more sense to borrow it from a neighbor, rent the item, or repurpose something you already have. Or just wait a day and re-think the purchase.
- Look for ways to grow your income. Ask for a raise. Get some training that will get you a better paying job. Get a second job. Or a third one.
If all of this seems overwhelming, start small. Start by reducing expenses by one thing. Continue to reduce expenses by 10 percent every year until you are “living small”. This means spending only half (50 percent) of your take home pay on essential living expenses. Put 30 percent in savings. And spend no more than 20 percent on “extras”.
Extras include entertainment (anything from going out to the movies, to staying home with Netflix or iTunes, concerts, magazine subscriptions, computer games, etc.), dining out and takeout, home services, personal services, vacations, many technology expenditures, and any other non-essential expense. Internet service may be an essential technology expenditure for your household. But game consoles, television service, and smartphones are “extras”.
Once you get there, stay small. If you receive a raise or bonus at work, save it and continue to live on the same budget. Most people who get to this point find it gets easier and easier to not spend money. They prefer the sense of security and satisfaction that living below your means brings. They being to realize, they are slowing getting rich.