Living Below Your Means

 

 

The Budgeting Series

 

 

*NOTE: This is part 2 of a series on budgeting.*

If you have missed the previous articles in this series, I encourage you to read them before moving forward – they are in linear order for the reader’s sake:

1. Budgeting 101
2. Living Below Your Means
3. Avoiding Lifestyle Inflation
4. Reevaluating Your Budget
5. Tightening Your Financial Belt
6. Introducing Finances to Your Children
7. Tips to Help You Budget Better
8. Reverse Budgeting and Building a Case for Opportunity
9. What Do You REALLY Need To Live?

Once you have an understanding of what budgeting is – and isn’t – you can then move on to another key tenant of budgeting: Living below your means.

As part of the budgeting series, this next article should come as no surprise. However, I encourage you to check out the first article before continuing:

• Budgeting 101

The reason is that basic budgeting, which is nothing mystical or scary, is foundational. It’s best to build on a solid foundation; sure, you can build a castle on sand, but it won’t weather the storm – far better to build on rock.

 

Living Below Your Means – What it is

 

 

Living below your means allows you to experience more of the world – whatever that looks like for you

With the availability of information at your fingertips, you have likely heard the term before. But what is it – and what does it mean?

Let’s operate under the working definition that living below your means “is ultimately spending less than you make.” For argument’s sake, we are going to make some assumptions and use them as an example to illustrate this.

Let’s say you make $25 an hour. Moreover, let’s assume your benefits do not come out of your hourly wage – they are on top of it. (Consequently, if your finances do not reflect this, perhaps you need a career change – and I can help with that – feel free to reach out.) We will also make an assumption about your family status: you are married and have two kids who are in school (so, no childcare); that seems reasonable to me. And, in line with many others, I’ll also go ahead and assume your spouse also works – and we will give a yearly value of $30,000. This will add to your overall household income and it likely reflects the reality of many families.

Now we will make additional assumptions, this time about what bills you have. Rather than reinvent the wheel, I’ll use the example from the Budgeting 101 article I wrote several months back. Those assumptions are found below:

• $1,000 house payment (likely your biggest expense)
• $200 power bill
• $150 water bill
• $750 food budget
• $700 car payment (the average amount in America for a new car according to NerdWallet)
• $500 IRA contribution (125 weekly – the amount you need to contribute to max out at $6,500 a year for 2023)
• $250 gas/fuel
• $150 cell phone plan
• $100 car insurance
• $50 internet
• $50 clothing
• $100 entertainment (varies to your tastes)

And they are reflected in the super simple budget sheet found here also:

You can go to the Federal Trade Commission at consumer.gov to get your own basic budget worksheet

 

Living Below Your Means in Action

 

Budgeting – and living below your means – can produce some good results for you if disciplined

 

With the above information, we can see that just on your income – and excluding your spouses’ – you can afford to pay all of the bills. This means that you can include ALL of their money as extra and you are effectively living below your means. Why? Because you are surviving on a single income – all of your money going to pay the bills – and your spouse’s income can be used for discretionary spending, investing, saving, etc. The key point is that it isn’t absolutely necessary to survive, and that is a better position to be in.

And before someone chimes in about how their bill situations are different, I just want to say I already know – the example is different from my own finances. The point of the example above is to provide some kind of framework for you to see, tweak it to more accurately reflect your own, and gain a better understanding of how you can get your financial house in order – and then make adjustments so you can live below your means.

A key takeaway from our example above is if we take the $30,000 your spouse makes, plug it into Talent.com which has an online calculator that helps determine taxes, and select a state – I used Virginia, and the net (takehome) pay came out to be $24,857.

That’s $24,857 of additional income you don’t have to spend toward bills – divided by 12 that’s $2071 a month. IF you had $24K freed up from bills what could/would you do with it?

Let’s see – if done properly, you could pay a substantial amount on your house and get out of mortgage debt a decade or two earlier. What freedom do you have if your biggest bill – in most cases, it’s the mortgage – is paid off? In our example above, we used $1,000 as a benchmark. So with the house paid off, you would have $3071 A MONTH to use for something else – what a novelty!

Let’s evaluate it with hard numbers for a second with three different examples:

$24,857 per year in extra income x 5 years = $124,285

$24,857 per year in extra income x 8 years = $198,856

$24,857 per year in extra income x 10 years = $248,570

There you have it in real numbers folks – look at how much actual mortgage debt you could pay off during the time outlined. Imagine that; having the ability to pay off your house completely in 10 years or less because you lived below your means!

 

When You Don’t Live Below Your Means

 

THIS is what happens when you don’t live within your means: your teeth are set on edge

 

Perhaps you’re wondering, what happens when you don’t live below your means? I’m glad you asked!

At best, you are living paycheck to paycheck with no room to breathe. CNBC says it’s 58%. LendingClub states that it sits at 60%. Interestingly, Market Watch reports that 49% of those who make over $100,000 report they are living paycheck to paycheck. VERY interesting, indeed.

There are many others, however, who are in worse situations. For example, Ramsey Solutions reports that the average American household has $14,241 or 787 billion total in credit card debt and $31,142 or 1.42 trillion total in auto loan debt – and both are VERY common as a result of not living below your means. Debt.org reports that there is 986 billion owed in credit card debt and 1.55 trillion owed in auto loans. (Interesting is their statement that “The wealthier you are, the more likely you will carry debt. Of course, the wealthier you are, the easier it is to erase that debt. The lower your income, the more of it goes to paying debt.”) That last statement: “The lower your income, the more of it goes to paying debt” is absolutely true.

There are numerous other studies out there depicting various amounts of debt – and I focus on credit card and auto because they are the two you are most likely to acquire because you are not living below your means – and that should alarm anyone.

Investopedia, in their article “Top Five Reasons People Go Bankrupt,” states that “As many Americans live paycheck to paycheck, losing a job and a source of regular income can cause significant financial strain. A 2019 Charles Schwab survey found that 59% of Americans live paycheck to paycheck.” I’d say that underscores my point precisely.

 

Personal Example of Living Below Your Means

 

We live below our means to enjoy scenery like this

 

I can hear someone saying, “Hey, I understand what you’re getting at, but my life doesn’t reflect the simplicity your example has. For several reasons, I’ll grant you that. I’ll highlight the most important difference as far as I’m concerned, though, and it’s intensely personal.

Our own personal family finances reflect living below our means – but not to pay off mortgage debt early; instead, we decided to be a single household income so my wife could stay at home and raise our children. We made a conscious choice because we wanted to invest in our kids and my wife wanted to homeschool our kids. Along with that, they get a far better education, have tremendous freedom to take trips, and see things they normally would not. They are living their best life.

And, here is the kicker, all of that would not be possible if we didn’t live below our means. But I want to take it a step further here and point out how important budgeting actually is; after all, you can’t expect to live below your means if you don’t know what those means are!

Even more important when it comes to living below your means is to REALLY evaluate your budget – which is just keeping track of how much money is coming in and how much money is going out – to see what you may need to trim in order to live below your means.

For example, our budget doesn’t include car payments – I loathe the idea of paying for a car for several years. Instead, when we were in the market for a new vehicle, we dropped over $24,000 and paid cash. We wouldn’t have been able to do that if we weren’t already living below our means and saving money! And since we still don’t have a car payment, we can continue to save and live below our means.

 

Variations of Living Below Your Means

 

No two snowflakes are the same – just like budgets

 

At the end of the day, I realize full well every family’s budgetary needs are different, which is one of the reasons you have to be intentional about taking a hard look at your own finances. Only you know the state they are in and where you could improve – and almost everyone can do just that.

Maybe your mortgage is higher ( I suspect that is the case for many people, including me). Maybe your car loans combined are higher. Perhaps you eat out too much and know you can cut back. In my example, I had you maxing out your IRA – maybe you have robust retirement savings from work and don’t plan to contribute as much. Perhaps you fell for the old lie that “you have to go to college to get a good job” – and have substantial student loan debt to pay back.

The point is, some self-reflection and assessment, coupled with intentionality, can take you from the poor house to being financially intelligent. Wouldn’t it be nice to have some cushion – money set aside just for when things happen – because they WILL happen? Wouldn’t it be nice if you had some emergency money rather than going into debt for ANY unplanned expenses?

What would it look like IF you had just $500 a month extra instead of a few thousand? $500 x 12 months x 5 years = $30,000, which is nothing to shake a stick at. I suspect everyone would appreciate that extra deniro.

 

Where Should You Begin

 

You have to start somewhere

 

Well, if you do not have a budget, I suggest you go over to Budgeting 101 and start reading there. It’s the foundation you need before you can even begin to think about living below your means. After you read the article, be sure to go over to consumer.gov and use the PDF. Take stock of your bills, write them ALL down, and capture ALL of your money going out. You NEED to know how much money comes in and goes out. THE goal – at least at the beginning – is to have your income at least match your spending.

After you have a budget, you can then begin to try and cut your expenses and live below your means – which is where this article comes in. Living below your means brings huge potential – it’s how people pay off HUGE amounts of debt in a short amount of time. And I’m not the only one who believes this, either. You can find other articles here, here, here, here, and here. There are literally thousands of examples online.

 

What’s Next

 

Next steps are always important, and you should be asking yourself what’s next

 

I’ve taken the time to break down the articles for the budgeting series I am putting out and put them in linear order – one builds on the next. Here they are: I’ll amend articles and include this list at the bottom of each, making it simpler to navigate from one to the other.

 

1. Budgeting 101
2. Living Below Your Means
3. Avoiding Lifestyle Inflation
4. Reevaluating Your Budget
5. Tightening Your Financial Belt
6. Introducing Finances to Your Children
7. Tips to Help You Budget Better
8. Reverse Budgeting and Building a Case for Opportunity
9. What Do You REALLY Need To Live?

The progression from one to another should be fairly obvious, but in case it’s not, I’ll be building the case and weaving the thread through this tapestry for a cohesive story. What’s more, no matter what step you are in your budgeting journey, you can read and refresh your thinking. In fact, I encourage it. It doesn’t take much to get you off track, and sometimes a review of the basics can help bring you back to reality.

In any case, feel free to read, re-read, and develop your unique budget and if you have any questions, send me an email and ask – I’m always down for helping people.