The first step to financial independence is to live within your means. To me, that automatically means living frugally, but that’s just how I think. My family struggled financially when I was growing up so I default to saving first. When I first started working, I lived modestly and saved what I could. I lived within my means, but I think I probably could have done better knowing what I know now. What would I tell my 21 year old self? Let’s see…
Track your income and expenses
When I was in my 20s, I never tracked my income and expenses. I lived within my means so I had more money coming in than going out and that was good enough back then. I was making pretty good money as an engineer and I didn’t spend extravagantly. Mrs. RB40 was also frugal, so we made a good team. However, I think we would have been better off if we started tracking our income and expenses when we were young. Here are the benefits.
- You know exactly how much money you’re bringing home every month. Then you can figure out how much you can really spend every month and make a budget.
- You know what you spend money on. Most people spend quite a bit of money on stuff they don’t need. If you track your expense, then you can consciously reduce those unnecessary expenses.
- You can see how much you save every month. You should save at least 15% of your income. If you don’t track your finance, you won’t know how much you’re saving.
- You can see your net worth grow. Seeing your net worth grow is addicting and it will motivate you.
- You will develop a good financial habit.
We never spent more than we made, but after we started tracking our expenses, we became even more careful. I know what we spend money on and they are things that make us happier. You can track your expense with a simple spreadsheet, software like Quicken, or a free website like Personal Capital. I’m sure there are apps to help you as well. It can be difficult when you first start, but after a few months it’ll be second nature.
Spend less than you make every month
This is common sense, but it can be difficult to do. If you don’t track your finance, it’s easy to overspend and think you’ll make up for it next month. I think most of us are responsible enough to spend less than we make on a monthly basis, so it must be those big emergency expenses that get us into trouble. That’s why you need some extra savings to take care of emergencies like a car repair. Save about 3 months of living expense so you’ll have a cushion when something unexpected happens.
Get rid of consumer debt
If you’re like most American households, then you have some kind of consumer debt. That’s not good. When you pay those high interest rates, you’re just enriching the banks and derailing your retirement. It’s best to avoid any consumer debt altogether, but life happens and sometimes you can’t avoid it. In that case, just keep working on paying off your consumer debts as soon as you can and avoid them in the future.
Save a sizeable portion of your income
The average American’s personal saving rate dropped to a dismal 2% in 2013. That’s just not enough to ensure financial security. Most financial advisors suggest saving 10-15% of your income. This saving will help you endure various emergencies that may arise and build up your retirement accounts. Personally, I think 15% saving rate is still too low. If you’re making a good income (more than $100,000/year), then you should be able to save much more than that. I’d shoot for at least 25%. Saving and investing more will give you options when you’re older.
Boost your income
As mentioned above, I gravitate toward frugality when I try to save more money, but that’s not necessarily the right way. There is only so much you can cut out of your life before you start feeling deprived. Increasing your income is probably the smarter way to save more.
The main source of income for most people is their fulltime job and it’s probably best to concentrate on that. Aim for a good raise every year and keep your eyes open for better job opportunities. An alternative is side hustling. If your career doesn’t pay that well, then side hustling can make a big difference in your income. The right side hustle can even lead to a more lucrative career and/or a more satisfying lifestyle.
Minimize lifestyle inflation
Lifestyle inflation is biggest enemy of living within your means. It’s good to boost your income, but the problem is that most people also spend more every year. Lifestyle inflation is unavoidable, but we really need to minimize it as much as possible. Do you really need that 2,500 sq ft home with 4 bedrooms and 3 baths? How big was your house when you were growing up? 5 of us lived in a 2 bedroom apartment when I was growing up and that was just fine. My mom had 9 siblings and they lived in a 2 bedrooms townhouse when they were growing up. Okay, that’s too crazy, but you know what I mean. The key is to make sure your income outpaces your lifestyle inflation. Don’t live it up if you can’t pay the bills.
Ignore the Joneses
Ignoring the Joneses seems to be difficult for most people. For me, it’s pretty easy because I don’t really care what other people think. Fortunately, I learned this lesson early in my teens. In junior high, I really wanted a pair of Reebok hi-tops. They must have been the fad back in the 80s. So I saved up $50 over the summer and finally got a pair before school started. It turned out nobody even cared what shoes I wore. The shoes didn’t help me jump any higher and I was still terrible in PE. From that day on, I don’t pay attention to cars, shoes, jewelry, or any other outward signs of wealth. Why spend money trying to impress the Joneses? They don’t really care what car you drive.
Learn to enjoy free/cheap stuff
Sure, it’s fun to spend money. I like eating out, traveling, and other entertainments as much as anyone. However, I think I found the secret to spending less money. You have to learn to enjoy free/cheap entertainments. These days we spend most of our time enjoying hikes, reading, playing at the playgrounds, cooking, listening to various free concerts, and ferreting out free and discount days at the museums around town. There are a ton of free things to do out there and you don’t have to spend a lot of money to have fun. Spending money for fun once in a while is good, but it shouldn’t be the norm.
These tips should be helpful for young people who are just starting out and even older folks who need some reminder. Ok, I gotta cut this short. The sound of the symphony has been wafting through the windows all day and now we’re heading to the park to see the show. The 1812 Overture is coming up soon and there are fireworks afterward. Ahh… Life is good. Have a great Labor Day weekend!
Do you have any good tips to help people live within their means?