Living Within Your Means: How to Do It and Why

A lot of personal finance advice out there sounds helpful in theory but is not all that fun to implement in practice. Let’s just face it – going from a spending lifestyle to focusing on saving can feel like you’re giving something up. But the truth is, it’s a bold and responsible endeavor to live within your means. Being intentional about setting aside money for various goals means you will be in a better spot to reach your long-term financial objectives. 

What’s Your Saving Rate?

Living within your means goes hand in hand with knowing your personal saving rate. It is simply the difference between what you earn after tax and what you spend. In order to know your saving rate, you must create and maintain a budget. Tracking your cash inflows and outflows allows you to get an x-ray look at your finances. You can do that with any number of budgeting apps or even a basic spreadsheet. 

Benefits of Budgeting

Now, tracking what you make and what you spend probably sounds tedious and time-consuming. But the good news is that you don’t have to budget for the rest of your life. You can simply use it to determine if you are living within your means or not. Budgeting gets you to see where you might need to cut back spending-wise and what you can remove altogether. Once you have streamlined your finances, you can then create buffers in your budget so that you can plan for the unexpected each month. 

Not Much Financial Buffer in America

And this stuff is a big deal. Americans are not saving well. As I write this, the Personal Saving Rate tracked by the Bureau of Economic Analysis is near its lowest level in decades. So, folks are spending right up to their limits, and many families are going beyond it. Making it a goal to have excess savings each month of, say, at least 15% of your after-tax income (not counting your retirement savings) helps you build an emergency fund as well as plan for actual fun expenses prudently, too. 

Give Yourself Some Wiggle Room

I do not want you to go crazy tracking every little purchase. A better approach might be to build buffers into your budget. Think of it like this: Let’s say your take-home pay is $100,000. You can set percentage targets on certain spending categories, plus or minus a percent or two. That way, there’s leeway from month to month while you continue to target a certain overall saving percentage.

Budgeting 101: You Do You

Everyone is different though. Separate strategies may be needed for low-income families versus those with a high income. The former faces higher grocery bills and housing costs, on a percentage-of-income basis, compared with the latter. More affluent individuals and couples must deal with taxes to a greater degree, which may be difficult to bring down (though there are strategies we can use to manage your total taxes owed each year). 

All people across the income spectrum, however, can take steps to reign in their spending or even boost their income to improve their saving rate. Perhaps going for a more affordable car, cutting back on the number of trips you take, and monitoring your food expenses are also ways to reduce expenditures after evaluating your household spending patterns. 

And there are benefits I’ve found to living within your means. Here are 5 of them:

1. No debt, less stress, more happiness.

Spending less than what you make means you can tackle debt quickly to get it out of your life. While there’s good debt and bad debt, anything with an interest rate above about 7% is generally a hindrance. A budget can keep you on track to pay down that debt so you can enjoy life and not worry about mounting interest costs. It’s funny – the joy of wiping a credit card slate clean or making that final mortgage payment is bigger than even hitting some big round net worth number for many people. In short, it is hard to put a value on the financial peace of mind knowing you don’t owe anyone anything!

2. A faster path to financial freedom.

Let’s face it. We all want to hit that magic number so that we can either retire from the nine-to-five grind or simply embark on our own passion-driven career roadmap. The truth is, there is no single number, but living within your means makes it easier for you to save and invest every two weeks or each month. Delayed gratification is a noble endeavor, and it affords you a prosperous future if you keep at it. With a financial plan and a saving strategy, we can project when you will be able to call it quits and live the life you want. 

3. Focus on your true ambitions.

Let me give you the inside scoop: Living within your means makes people think big picture. That makes a world of difference since you are not myopically fixated on meeting the financial challenge of the day. You can make ends meet, and then some, with few worries – that allows you to align your priorities to what you really want to achieve long-term. Another pro is that some financial flexibility offers you the chance to use money in a way that, the evidence shows, brings individuals a lot of happiness: giving it away. Some of the most at-peace and content people I know love donating to their favorite causes. And you can only responsibly do that by first living within your means. 

4. You can be a better shopper.

Getting back to daily life, I find folks who are intentional about saving develop savvy shopping skills. No, they do not turn into that crazy coupon lady at the grocery store, but they simply gain a sixth sense of what to buy and when, and when to hold off – all without feeling like they’ve deprived themselves. Savers also better avoid that retail trap known as impulsive spending. And they don’t turn into long-term hoarders. Have you seen that show on TV? Yikes.

5. A little left over each month for a splurge.

Let’s end on a happy note. Once you have prioritized your financial needs, cut out some unnecessary monthly subscriptions, and focused on what really matters, you’re in the pole position to cross certain money finish lines. Once you hit a financial goal, do what you do whenever you win – celebrate! Enjoy the moment. I give you permission to splurge – and you can have confidence knowing that you have earned it.

Next steps:

Are you struggling to live within your means? Do you even know what your monthly cash inflows and outflows look like? If you don’t, please consider constructing a budget and planning for the unexpected so that you do not have to rely on debt to get by. It takes baby steps, and the process of living within your means as a lifestyle happens over time, not overnight.