You want control of your financial health to meet the financial freedom. But budgeting and reconciliations of income and expenses are quite stressful. So you must live below means to solve them.
Living below means is one of the most important skillsets in personal finance. It’s best for building your wealth. It increases savings and eliminates debts.
More savings means more capital for investment. That’s how people get on their roads to early retirement or financial freedom.
What is the Meaning of Living Below Means?
We know the word means is income or earning. This means ‘live below means’ is to spend money lower than your income. In another word, it means your expense must be lower than income.
But, there is a risk of it being mis-interpretated. If it is important, then does it also mean it’s better not to spend your income at all?
When we say ‘lower than income’, how much lower is it advisable? To avoid such possible confusion, look at the given income report:
All of their income is $5,000. A spends lower than his income by $1,000 and B spends more than his income by $1,000. D spends 100% of his income and C spends nil.
So, A is living below his means. He saves $1,000 but B creates a debt of $1,000 by living above his means. C is within means – hand to mouth.
But D doesn’t spend at all.
If D doesn’t have other income, his financial habit is worse than A and C. If you don’t spend at all, why to work for money in the first place?
Can A spend lower than $4,000 to increase his savings? He can do it if he afford. But not like D who isn’t living but just hoarding money.
Living below means isn’t spending 100% of your income as much as it’s not outspending or not at all spending.
Why Must You Strive to Live Below Means?
You live below means to keep expense lower than earning. And to create some extra money for saving and then investing.
The goal is to increase your wealth; the main determinant of the financial freedom. Every extra money you save will be an income as Benjamin Franklin said.
The more you save, higher will be your saving rate. And the saving rate defines how soon you can make to your goals of an early retirement or the financial freedom.
If I am to retire from a 9-5 job in 10 years, I need 1.05 million as per 25X rule. One of the best strategies to get that 1.05 millions will be living below my means.
What Happens When You Live Below Means?
When the income is more than spending, a person’s financial health will be good. The rates at which they increase or decrease won’t matter much.
Yet a FIRE enthusiast’s interest will be at an amount by which the income is above the spending. Merely ensuring you spend less than income doesn’t explain all. 
A person earns $15,000 and spends $9,000. So he is living below means by $6,000. It is pretty decent. But the difference decreased to $1,700 by June which isn’t a good signal.
In this, a person earns an income of $9,000 and spends $4,800. He saves $4,200 in the first month.
However, when the income decreases, his saving also decreases despite keeping his expense same.
When the income increases, efforts must be made to keep our spending same or at least increasing at lower rate compare to that of income.
When the income is constant, it would improve the savings when we keep lowering our spending. But this shouldn’t compromise the quality of life.
If one can keep the expense same when the income is also fixed, the gap between the two must be realistic.
We can draw following conclusions when you live below means to attain a financial freedom faster:
- Income decreasing at lower rate is better when both income and expense decrease.
- When income decreases, the savings will decrease even if the expense is constant.
- Income increasing at higher rate is better when both income and expense increase.
- When expense decreases, the savings will increase even if the income is fixed.
- When both income and expense are fixed, the higher difference is better.
How is it When You Don’t Live Below Means?
When you do not live below means basically your spending is higher than income. This situation will set up your debt spiral; the biggest financial mistake you can ever commit.
If you don’t have previous savings to fill up the gap, the amount you get from banks or other forms of debts for living will keep increasing.
You cannot fill up the gap at once either unless you have some kind of a financial windfall. You must aim to reduce the difference and then bring the green line above the red.
In this, a person starts with an income of $7,000 and spending of $8,000. He didn’t live below means by $1,000.
Since all the way to June, he doesn’t live below means. He creates a total debt of $5,200 within six months.
His income is short by $1,000. Despite his spending remaining fixed, with decrease in his income his debt (gap) also increases.
This is a very risky situation. He has to do things that will either increase his income or decrease his spending or both.
In this case both income and spending increase at a same rate till May keeping the gap between the two equal.
Yet from May his income increases more than the expense narrowing the gap between the two. Gap is excess of spending over income.
This person didn’t live below means by $3,000 in Jan. But the amount by which his spending exceeds income is reduced to $200 in June. It is an improvement in reducing the debt.
His spending is same at $6,200 and income fixed at $5,000. His spending exceeds by $1,200 every month. The accumulated shortage of income is $7,200 by June end.
We can draw the following conclusions when you don’t live below means to attain financial freedom faster:
- Expense decreasing at higher rate is better when both income and expense decrease.
- When income decreases, the debts will increase even if the expense is constant.
- Expense increasing at lower rate is better when both income and expense increase.
- When expense decreases, the debts will decrease even if the income is fixed.
- When both income and expense are fixed, the smaller difference is better.
Why is it Hard to Live Below Your Means?
The moment you see extra cash in your hands, the lifestyle inflation shall kick in to push you to spending every penny of that money.
You become a victim of this paradox of the rich man in the car, and you buy things that aren’t necessary. In the process, you put your financial health at risk.
It’s the same reason why most NBA athletes become broke, even if they make millions.
The world is full of advertisements and consumerism. Companies spend billions to take money from you.
People who delayed instant gratification during Stanford Marshmallow Experiment succeeded in life. But it’s hard for us when everything is for adrenaline-rush.
Yet if you start with a proper money mindset and tweak your habits, it isn’t an impossible thing. You also wouldn’t feel forced and deprived.
First you answer why you’re for the financial freedom, what you need to achieve it, and how you gonna achieve it. Living below means will become part of your habit.
Bonus Point: Freedom and Bondage by Money
You’ve realized the importance of living below your means. When you live below means, you only have to think of increasing the savings to attain the FIRE.
When you don’t live below means, first you have to clear the debts created out of living above your means and then only focus in increasing the savings. I didn’t mention the interest part of the debts.
Therefore, if you spend less of your income you can save more, invest more, re-invest more, and then attain FIRE faster – the ultimate freedom of choice.
If you spend more than your income, i.e if you use money you haven’t earned you have to work to pay that first – bondage.
First three years, his income is lower than his spending. The gap between the two lines represents income shortage/debt he created.
Sooner or later he has to clear this debt. So from 3rd year onwards he is clearing the debt he created previously.
So if you live above means, money thus you use makes you a slave. You have to serve the master.
However, if he is starting from 3rd year onwards he’s living below means. The gap represents the saving i.e his excess money.
Money can give you freedom as well as bondage. Which one you aim for determines how you handle your money.
How to Prepare Yourself to Live Below Means?
You now know why it’s hard to live below means for most people. But you also know why it’s a possible thing if you follow principles or rationales to living below your means. 
There are many tips on how to live below means. But I have summarized all the tips on how to live below means in given 5 simple tips for living below your means:
- Develop Money Mindset.
- Create Financial Plan.
- Budget Your Expenses.
- Value-based Spending.
- Increasing Your Income.
Develop Money Mindset
In personal finance, perspective matters so much. It’s through it how your money mindset, life’s priorities and personal values co-exist.
Don’t think living below means and not using all your income as a self-deprivation. Consider it as building blocks of your financial goals or financial freedom.
Look at money as an important tool to solving many problems and one of them being expansion of your choices.
Create a Financial Plan
Your financial plan will be the skeleton of your finance. It’ll not only guide your financial habits but will also put your every penny into use.
A proper financial plan must have long-term and short-term targets, and debts clearing plans. It should have your F-you fund plan and also investment structure.
Budget Your Expenses
If financial plan takes care of your long-term financial goals, budgeting takes care of your current financial habits for short-term goals.
It’s a systematic allocation of your income based on your financial needs. Your monthly grocery bills, pay yourself first structure, and automatic saving plans all will be parts of your budget.
You can use MS-Excel, Apps, envelop system, percentage-based budgeting etc. Personally I use the percentage-based budgeting system of 50/30/20. This can be tweaked as per your requirements.
Unless you have a strict budget plan, you can’t track your spending easily. And that would be a ticket to a financial disaster.
Value-based Spending
Spend your income wherever it’s needed. But know your needs and wants well. Whenever there are products up for sale, don’t rush. Look if you already have others that can do the same job.
Purchase things looking at their utilities and not because your TikTok star recommends them or Facebook celebrities have them.
Don’t purchase expensive cars just to prove how rich or cool you are and seek society’s respect. People don’t admire you for having them. Instead you’ll become a focal point of their jealousy.
When consumerism is almost like a national sanction activity, you can step outside and see if you really have to follow the crowd.
Increase Your Income
My friend once said, “if you cannot earn more, you must save more.” It means increasing income is more important than reducing expense to building wealth for financial freedom.
You can’t keep on reducing expense after certain point. There is a limit how much you can reduce your expense.
However, most of the passive income don’t have upper limits unlike active income. You must have multiple income sources. More passive income is better.
You must invest in yourself for new skills or courses to improve your market value and then increase your earning capacity. You must also know monetary value of your services.
Conclusion: Importance of living below means
Living below means and then saving the difference is easy. But using all the income and saving nothing is easier. We humans always do the easier things.
Therefore, in the process we remain within our means and at times even beyond our means.
We have now realized how important it’s to live below means to create various financial safety buffers, build wealth and then ultimately attain that financial freedom. Live below means!
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