Two out of every five American adults don’t have the financial means to cover a $400 emergency.1 Strangely, 74% of Americans indicated on the same survey that they were “at least OK financially”.1 To cover that hypothetical $400 emergency, two out of five Americans would be forced to sell something or borrow the money.
39% of people have a zero balance in their savings account. Three out of every five Americans can’t cover a $1,000 emergency with cash they’ve saved.1
Money management experts say the most important aspect of financial stability is your ability to cover an emergency expense with funds from your savings. If you don’t have an emergency fund, don’t panic. Living below your means will help you free up money to both pay down your debt and build your savings.
There are many valid reasons to not have an emergency fund. High housing costs in some metropolitan areas make it nearly impossible to save money. Heavy debt loads due to predatory lending practices, inadequate or falling income levels, and health problems resulting in non-negotiable expenses like prescription drugs and the management of a chronic condition stand in the way for a lot of Americans.
What it means to really live below your means
Living below your means doesn’t have to include dramatic changes to your lifestyle. Assuming your income is even somewhat adequate to cover your expenses, some rearranging of your habits and money-management tactics should be enough to help you make your money work hard to help you reach your goals.
Most people rely on credit to cover their financial emergencies. They don’t handle small problems with their health, their car, and their home because they don’t feel like they can afford to do so. Most Americans spend too much money on things they don’t need and may not even really want. Living below your means is something you do for your own well-being. It allows you to save money, take better care of yourself and your loved ones, and enjoy the best parts of life without constantly worrying about where you’ll find the cash to cover next week’s bills.
When you live below your means, you make more money than you spend. Since you are in control of both how much money you make and how much money you spend, the process of moving from heavy debt and stress about having enough money to spending less than you make is not as hard as it may seem at first.
As you work through your budget, evaluate your past spending habits, and pay off high-interest debt, it may become obvious that your living costs are too high or that your job simply doesn’t pay enough for you to continue living this way. If you see big changes on the horizon, don’t panic.
You don’t have to go into super-frugal mode or stop buying groceries. Living below your means is a way to make smart choices about your resources.
It doesn’t always make sense to put off spending money
If your roof is leaking and you ignore the problem, you may end up paying for much more extensive repairs to your home than a $500 patch to a roof that is otherwise in good shape.
An aching tooth requiring a $400 filling could easily become a horribly painful problem on a weekend, creating a bill for a root canal, crown, and emergency treatment that adds up to $1,500.
That slight shake in the front end of your car as you drive down the highway could mean you need a $120 alignment. If you ignore it and break a tie rod, you may end up breaking down on the highway. This drama isn’t just inconvenient. After you replace the blown tire, broken tie rod, and pay the tow company, your expenses could easily reach $800.
People who are in financial distress and have decided to live frugally to save money often make the mistake of putting off crucial repairs and maintenance to their homes, their vehicle, and even themselves. These choices have consequences that may cause additional stress and much higher bills.
Actions you can take to start living below your means right now
Cut expenses
Start cutting expenses in the least painful places. Go through your subscriptions, first. The HBO subscription you purchased so you could watch the last season of Game of Thrones seemed like a great idea. If you won’t miss it now that you’ve binged on several seasons, cancel it. Remember, you can always re-subscribe if you miss it. HBO will take you back anytime.
The same goes for your subscriptions to Birchbox, Dollar Shave Club (check your cabinet and count your razor refills to confirm that you are stocked up until 2021), and your 31 monthly deliveries from Amazon Subscribe and Save. Be ruthless and keep in mind that every single company that you cancel your subscription with will be thrilled if you change your mind. If you regret your decision later, you can always sign up again.
When you cut expenses, don’t look at your budget. Look at your bank account and credit card statements. You want a clear picture of your recent spending habits, not a picture of your ideal financial future. So, if your budget says you’ll spend $150 per week on groceries, but your recent transactions indicate that you regularly spend $225 per week on groceries, cutting your spending in this category by $75 per week frees up $300 each month.
Stop paying interest
Interest payments support credit card companies and banks. Or worse, they support payday loan companies and high-end stores in the mall. Credit card debt is a huge drain on the budgets of millions of Americans. After you make adjustments to your spending habits so that you no longer rely on credit to meet your day-to-day needs, you can tackle your high-interest debt.
Here’s how to stop paying interest:
1. List your debts, their total amounts, minimum due each month, and interest rate. Use paper, a spreadsheet, or a budgeting app like Mint.
2. Put them in order, with the highest interest first.
3. If you haven’t already automated minimum payments on each of those debts, do so now. This helps to protect and even repair your credit by making sure you make every single payment on time. When you miss one payment, credit card companies can raise your interest rates to the highest amount allowable by law immediately.
4. If you have accounts in collections, add those to the list. Put them at the very end in order from the lowest amount due to the highest amount due.
5. Pay down the first account on your list as quickly as possible. Use the money you’ve saved from canceling subscriptions and cutting costs to reduce that one debt to zero. You can and should make multiple payments each month. When you have a bit of extra money, throw it at that debt.
6. When you pay off a debt, add its minimum payment to the minimum payment of the next debt on the list. Here’s how it works:
You’ve recently paid off a $4,325 balance on a Kohl’s charge card that had an interest rate of 29.99% and a minimum monthly payment of $65.
Your next debt is a Capital One credit card with a 19% interest rate, a $8,423 balance, and a minimum monthly payment of $120. So, not only are you going to throw all of your disposable income at this Capital One card’s outstanding balance, but you are also going to raise the auto-payment of the monthly minimum amount from $120 to $185. When your balance on the Capital One card is zero, you’ll add $185 to the auto-payment of the monthly minimum of the next account, and so on, until your debts are paid and you are no longer spending your hard-earned income on interest.
If you have accounts in collections, pay them after you pay off your current high-interest debts. This is the smartest way to spend your money. When you are no longer spending money on interest, you can dedicate that income to negotiating a settlement with collection agencies that purchased your charged-off accounts from the original creditor.
Save first
If you work for an employer that issues you a regular paycheck, you’ll need to make decisions about how much tax to withhold by filling out a W-2 form. Then, you’ll decide whether to participate in your company’s benefit programs. Health insurance, flexible spending accounts for out-of-pocket medical expenses and childcare, life insurance, and retirement savings may be options that you can pay for with pre-tax payroll deductions.
Your total pay minus these deductions equals your take-home pay. The next, and most important bill you must pay is a deposit to your savings. While you make changes to your lifestyle and spending habits that allow you to live below your means, it’s fine to start small with your savings habits.
Here’s how a beginning savings plan may look:
Gross Paycheck: $1,400
Health Insurance Premium: -$240
Flexible Spending Account: -$50
3% 401(k) account deposit: -$42
Taxable Pay: $1068
Total taxes deducted: -224
Total Take-home Pay: $844
3% Savings account deposit: $25
Money available to spend: $819
The family in this example has a gross annual income of $72,800. They don’t have anything in savings, but they live in a small Texas town and have a fairly low cost of living. Their mortgage is $720 per month and they have $13,000 in credit card debt. With two car loans that add up to $625 per month and one child with high medical costs, they often feel like there’s not enough money to get them through the month.
If they continue to try to save “what’s left” after the bills are paid, they will continue to fail. Instead, by starting small and prioritizing their savings account, they’ll have $1,300 after one year.
When both parents get their annual raise, they can bump up their savings from 3% to 5%, which will further accelerate their ability to save. If they commit to depositing 20% of their $3,000 tax refund, they’ll have $1,900 in savings. That’s enough to prevent them from having to borrow money to cover financial emergencies like car repairs or storm damage to their property.
Decide how to spend your money before you have it
Your money should work hard for you, but unless you give it direction, it’ll end up spread out all over Starbucks, local restaurants, and eventually land in your closet in the form of clothes you’ll never wear.
Or worse, it’ll disappear as you pay interest on loans and credit cards. Not everyone has a perfectly reliable income. This makes sticking to a budget even more difficult. Luckily, we have powerful technology to help us decide how to spend money before it lands in the bank account.
If your past methods of handling money have left you feeling like financial management isn’t for you, don’t worry. You have many options. Budgeting apps like You Need A Budget, Mint, Wally, Mvelopes, and BUDGT make your decision process much simpler. These apps, designed specifically for people who may not be naturally inclined to consistently stick to a budget, could be the key to your success.
Try a few until you find one that works for you. If budgeting on paper or carrying only cash works for you, do that. The important part of deciding how to spend your money before you have it is removing impulsive spending habits from your life. If your money is working hard for you, it’s less likely to disappear or go to waste.
Create a budget that works for you
After you set aside money from your take-home pay for your savings account, consider how you’ll spend what’s left. Your budget is a tool that should work for you. It’s not supposed to make you feel tied down or restricted. Your income restricts your ability to do and buy things as you please. Your budget is a tool that tells your money where to go, just like a hammer tells a nail where to go.
You are in charge of your budget, so if it isn’t working or if it’s causing you pain, you can make changes. If your income is so low that you have a hard time living within a budget, you must focus on ways to increase the amount of money flowing into your household.
For now, it’s crucial that you live within your means in the short-term to avoid creating problems for yourself later. Doing so will set you up to save for emergencies, pay off debt, and become better prepared for your future.
Sources:
1. Federalreserve.gov. https://www.federalreserve.gov/publications/files/2017-report-economic-well-being-us-households-201805.pdf. Published 2019. Accessed January 28, 2019.