Are you stuck in debt and want to get out of your current situation? It’s time to start living below your means. If you can do that, you can get rid off your debt fast, build financial security and ultimately reach financial independence.
Lots of people live beyond their means, they spend more than they earn. If that’s you, you are probably in debt at this moment. Something has to change and you have to start now to gain control back over your money.
If you can manage to live below your means, which means that you earn more than you spend, you can actually build up wealth. It means that you can work towards the freedom to live your life exactly how you want to!
Living within your means
Living within your means sounds like you’ve got everything worked out. But it basically means that you can pay all of your bills and survive until your next paycheck. You are actually living paycheck to paycheck.
Yes, you can stay out of debt and still have food on the table, which is great of course! But there is no money left to save or invest. You aren’t building financial security in case unexpected things occur. You can’t take a job that pays less, because you immediately run into problems.
What if your dream job doesn’t pay that much? Or what if you would love to work for a good cause? Or maybe you want to travel the world and quit your job for a while. To make such dreams reality, you need to start living below your means.
How to start living below your means
If you live below your means, there is money left to save or invest. To achieve this, you need to spend less, build an emergency fund and build up passive income.
This is for you if
- You’re in debt
- You don’t have an emergency fund
- You’re living paycheck to paycheck
- You want financial security
- You would like to retire before you’re too old to enjoy retirement
- You want to have choices in your life
And there are many more reasons why you want to start living below your means.
There are a couple of steps to take. You have to be willing to change the way you think about money to make this happen. Let’s walk you through all of the steps and I’m certain you will succeed!
Start by setting your goals.
- What do you want to accomplish in life?
- Why do you want to accomplish this?
If you have a clear reason why you want to reach your goals, it’s more likely you are going to achieve it.
For example: You want to get out of debt, because that gives you less stress. And by not having to pay off debt every month, you can use that money to save up for a trip you’ve always wanted to take.
Are you familiar with SMART goals? SMART stands for Specific, Measurable, Achievable, Realistic and Timely.
If you specify a goal this thoroughly, it will help you to focus and makes the chances of success bigger.
More information: What is a SMART goal?
Know what comes in & what goes out
It all starts with knowing where you stand. How much money comes in and how much is going out every month? You have to be really honest with yourself. Only then you can change things and work on financial security for you and your family.
Grab a pen and some paper or use a spreadsheet, get your bank account overview of the last couple of months and write down everything, even the smallest expenses.
You might have a flexible income. To be save, take the lowest income of the last couple of months as your monthly income. In months you make more than that, you can save or invest extra money.
Start living frugally
Being frugal doesn’t mean being cheap. It means that you are conscious about your spending, you don’t buy unnecessary stuff and you always think before you buy to avoid impulse buying. It’s basically living the simple life and enjoy the simple things in life.
A frugal life doesn’t mean that you can’t enjoy life anymore. It’s about making choices and looking for cheaper ways to enjoy life. It’s up to you how much you want to save every month.
If you are perfectly happy with saving $100 every month so you can still go out to eat once in a while, do it. The more you save, the faster you will reach your goals. But life isn’t all about reaching your goals and feeling crappy in the process. Finding a balance is key.
Change your money mindset
To live a frugal life, you have to change the way you handle money and the way you think about it.
Are you in debt because you bought something without having the cash for it? I’m not talking about a mortgage here. But a car, furniture or clothes for example.
Going into debt for things like that is such a waste of money. So the key is to never buy something you can’t afford. Just save for the things you need or want.
A good way to change your money mindset is to do a buy nothing challenge or a no spend month. If you challenge yourself to not spend anything on “stuff”, you have to be creative. If you postpone buying, you often find another solution or it turns out you don’t need it anymore.
Related: 16 Ways To Change Your Money Mindset
Spend less than you earn
Since you’ve tracked your spending in step 1, you can use that to see in what area’s you can save money. There are always ways to save money on the household expenses, like utilities and insurances.
Another big expense are usually the groceries. We all need food, but it doesn’t have to cost so much. There are lots of tips & tricks to be found to spend less on groceries.
Related: 85 Ways To Save Money Every Month
Increase your income
When you’ve done everything you can to spend less, but still have trouble to live below your means, it might be a good idea to look for ways to make more money.
Maybe you can get a raise or look for a job that pays more. Another option is to look for a side hustle. You can make money in all sorts of ways nowadays. You can even make money from home while your kids are asleep. That’s the beauty of the time we’re living in right now.
Related: 10 Ways To Make Money From Home
Get out of debt
Debt is expensive, so you’ve got to get rid of it as soon as possible. At least the ones with an interest rate. Start with the debt that has the highest interest rate to save more money.
Pay as much as you can afford towards the first debt. Pay only the minimum required payment to the other ones.
Once you paid off debt #1, use that money to pay off debt #2 and then #3 and so on. It will go faster and faster as you will free up more money to pay towards your debt every month.
Personally, I wouldn’t pay off debt with a low interest rate (like a mortgage) as fast as I can. You can read more on my view on this here.
Build an emergency fund
In the meantime, start an emergency fund to avoid getting into more debt. An emergency fund is nothing more than a savings account with some money on it to use when you don’t have other options.
Unexpected things happen to everyone and unfortunately, they usually cost money. Having an emergency fund means that you don’t have to put yourself in debt in these situations.
To start your emergency fund, include it in your expenses every month. If you can put $100 towards you emergency fund every month, in just one year, you’ve got a solid fund of $1200.
When you’re out of debt, you can build up your emergency fund further towards about 6 months worth of expenses. This will stop you having to stress out when something happens. Even job loss isn’t so stressful if you know you can pay the bills for a couple of months while looking for a new job.
Build a passive income
Once you’re out of debt and have build up a basic emergency fund, it’s time to build a passive income. Passive income is income without having to work for it. It’s always smart to have multiple income streams in case something happens, like job loss.
Passive income can come from investing in things like stocks, bonds, peer to peer lending or real estate.
When you invest a decent amount if money for a while, you can even reach financial independence. When your passive income exceeds your expenses, you can consider yourself financially independent.
The best thing about investing is compound interest, which is interest over interest.
Like Einstein said:
“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
I will give you an example and will use 7% interest rate as that’s the average annual growth of stocks. Something lots of people invest in. The starting balance is $0.
A few examples:
With a compound interest calculator you can see how much capital you build up when you keep your money invested. Based on 3 examples I will show you how awesome compound interest is:
You deposit $100 per month for 10 years. Based on an average interest rate of 7%, after 10 years you have $17,409.45 while you have only deposited $12,000.
After 20 years, your investment of over $24,000 has grown to a capital of $52,396.54
You deposit $250 per month for 10 years. After 10 years, you have collected an amount of $43,523.62! In this case you have invested $30,000. That’s a profit of more than $13,000 without having to work for it!
After 20 years, your investment of $60,000 has grown to $130,991.35
You earn well, live frugally and can therefore put in $500 per month. Based on a starting amount of $0, your investments are now worth $87,047.23. Your own investment is $60,000 after 10 years.
After 20 years, your investment of $120,000 has grown to a massive $261,982.70
These examples show how awesome compound interest really is. It takes time, but you don’t have to work for it and still earn a lot of money if you are patience.
Keep in mind: Of course, investing comes with a risk. Nobody knows if stocks will keep growing in the long run. We can look at the past, but we can’t predict the future. So make sure you only invest money you can afford to lose!
Conclusion: You can reach financial independence
Think about what you want to achieve and why you want to achieve this. Set your goals, follow the steps and go for it. I know it takes time and dedication and it isn’t always easy. But the results can be awesome!
Take one step at a time to avoid overwhelm. I know you can do it!
When you can start living below your means, pay off your debt and invest money to earn a passive income, you can reach financial independence. This will give you so much freedom and options in your life!
You will be independent, you can make choices and you can do exactly what you want to do. How does that sound? What would you do with your life when you are financially independent?
How far are you in reaching your goals? What steps are you struggling with? Let me know!
If you have any questions, you can always contact me through email or social media. I will always try to help you with any questions you have. There is no such thing as stupid questions as asking for help is a good thing. Asking questions means you are working towards more knowledge and going for progress!