Many people list “live within your means” as one of the greatest pieces of financial advice they’ve ever received. And for good reason. Living within your means is what keeps you out of debt and gives you the flexibility to adapt to life’s changing demands and desires. 

When you live within your means, you can rest easily knowing that you are financially secure. You don’t have to worry about paying your bills if one little thing goes wrong. It becomes less likely that you’d lose your home if you lost your job and means that you can go on vacation without coming back to a pile of bills you can’t pay. 

Getting ahead, breaking the paycheck-to-paycheck cycle, and building wealth all require living within your means. 

What does it mean to live within your means? 

Living within your means at its most basic level means spending less than you earn. But this definition is not quite adequate. If you want to get ahead and build wealth, you have to spend less than you earn, and include saving for your goals and investing for the future. 

If you spend less than you earn, but you’re not paying off debt or saving for the future, you are not living within your means. 

Think of the amount you save each month as an expense. Each time you transfer money to a savings or retirement account, you count it as an expense (money out) just like your mortgage, food bills, etc. 

Living within your means does NOT mean you can’t take on debt to buy a home, renovate a home, buy a car, go to college etc. It DOES mean that you need to make sure you can afford the payments AND save for retirement, pay the bills, etc. Debt (when it comes to mortgages, business loans, or student loans) can be a tool to help you get ahead, but you have to be able to make the payments without putting yourself at excessive risk. 

Who should live within their means? 

It may feel like living within your means is a money skill only poor people need. In fact, society loves to shame poor people for spending too much money and buying the wrong things. But there is no correlation between the amount of money you have and whether or not you live within your means. (I’m looking at you with the boat and the jet ski and the cabin and the second mortgage, but no retirement savings.) 

Many of us like to live like rich people even though we don’t have the money to pay for it. You just never know if your neighbor who went on the dream trip to Hawaii has been saving all their money for years or if they’ll be coming home to a pile of credit card debt. 

And if you need more evidence that living outside of one’s means isn’t a poor people problem, look no further than celebrities like Mike Tyson and Nicholas Cage, who famously squandered their fortunes on everything from mansions and luxury cars to exotic animals. 

Living within your means is a skill people of all income and wealth levels need to learn. 

How to live within your means

Living within your means is simple, but not easy. We all understand that it requires spending less than you earn, reducing spending, and saving more money. But making it happen is another thing entirely. 

First, here’s how you live within your means:

1. Forgive yourself.

There are many reasons why it might be challenging to live within your means. Many of the reasons aren’t even within our control (the economy, losing your job, medical conditions, lack of social safety net, etc). No matter how you got to this point, it’s important to forgive yourself and decide to move forward without bringing the sense of shame with you. 

2. Take stock of your situation.

You need to understand how much money you have coming in and going out before you can start to make changes. If you have no idea, start writing down everything you buy and review bank and credit card statements. Add up totals by month to see how much your income and expenses are and how they relate to one another.

3. Create a spending plan (aka a budget).

Once you know where your money is going, you need to figure out where you want it to go. And if there’s not enough for everything you want to do, you need to find things you can cut or figure out how to earn more. Think of it like a big puzzle where you have to play around to put the pieces together.

4. Remember that everything is a tradeoff.

As Mike Tyson and Nicholas Cage demonstrated, none of us can buy everything we want whenever we want. When you buy one thing, you’re giving up the opportunity to put your money toward something else. You have to (get to) choose where you want to spend your money. The more you can align your money with your values and goals, the more satisfied you’ll be. 

5. Cut things you don’t care about so you can devote more money to things you love.

Find expenses that you can reduce or cut in areas that aren’t important to you (like that gym membership you haven’t used in months). Then redirect that money to other areas. It’s all about setting priorities for your money.

6. Make sure you include savings (and debt payments) in your totals.

Savings should definitely include an emergency fund and retirement, but if you have enough money, you could also include savings for any other goal you have. Think vacation fund, college savings, home remodeling, wedding, new home, etc. 

If the steps are simple, why is living within your means so hard? 

Living within your means can be challenging because money is emotional. We think money is just a set of numbers, but the reality is that it is our feelings and behaviors that make managing money difficult. Money is never just money. These little pieces of paper (or digital bits of code) are infused with meaning way beyond their numerical value. 

Much of how we think about money is actually learned in childhood. If you grew up in a frugal family that saved every penny, you might think that spending money is bad. Or you might have grown up watching your parents lose their money and so you believe that money should be spent instead of saved because you only live once. Conversely, growing up with parents who squandered their money might have made you into a person who is extra vigilant with their finances. 

Overcoming these ideas begins with awareness. What did you learn about money as a child and how has it shaped your current money habits and beliefs? 

In addition, our money beliefs are shaped by certain human biases and tendencies. 

For example, we tend to favor thinking about the present rather than the future. Our immediate needs and desires seem more pressing than retirement, which we see as far away. We struggle to save for the future because we think we have lots of time and we’d rather buy things in the here and now. 

Another example is that humans are social creatures and many of the ways we are social involve spending money. It’s a challenge to not spend money when hanging out with friends because it often seems like the choice is between spending money or not seeing your friends. Finding ways to be with people without spending money is possible, but it’s not always easy to make happen. 

Which leads me to the last human bias/tendency: inertia. It’s simply easier to do what we’ve always been doing than it is to make changes. We get programmed to act in a certain way and it takes a huge amount of effort to figure out what to change and then how to make it happen. 

These are just a few of the reasons why it can be so hard to live within your means when you previously were not. 

It all comes down to the fact that we are human and we have lives that we want to live. The key to overcoming this is to get really clear on what is important in your life and then create reminders to help you put those priorities first. 

Are you interested in having someone help you start living within your means? I can help!