Step 4: Live Below Your Means – Waaaay Below

Everyday you hear people talk about how we should all “live within our means”. 95% of people don’t do it. That’s why household debt ratios are at an all time high. But if you want to pursue FF, even living within your means isn’t going to cut it. You need to learn to live below your means. The further below your means you can handle, the faster you’re going to reach FF.

Evaluating your spending habits is an absolute must in this journey. So is learning to recognize your wants vs. your needs, and understanding what exactly being able to afford something means.

People are often shocked when they see that Mike and I own a Tesla. It doesn’t exactly jive with the general train of thought of the whole FI movement, nor does it seem to conform with the title of this post. But remember in Step 1: How Do You Measure Your Wealth I talked about how important it is to set your financial goals around your values? One of the values I listed for Mike and I was taking steps to improve our impact on the environment. We also strongly believe in Tesla as a company, and the goals and initiatives that Elon Musk is trying to achieve through Tesla and SpaceX. As a result, we made owning a Tesla a financial goal we wanted to achieve before we fully retired (and we did, but just by a couple months!) We intend on keeping the vehicle for 15-20 years and doing a ton of road tripping as a family (with free supercharging the entire way!). The free super-charging also gives me the ability to hop in the Tesla and drive to visit my family ANYTIME I want. With no $200 gas charge each time, and a free place to stay with my family, the “cost” of going to seem them is whittled down to the drive time.

But even with a list of “great reasons” to “justify” our decision, the vehicle was still a want and definitely not a need. And one could argue it was an exorbitant want at that. Trust me, we get this. We nicknamed the vehicle Indefensible (Indy for short), just because we fully recognized that it was a ridiculous expense. So we took all our wonderful reasons to want this vehicle and looked at a final determining factor.

We could afford it.

Go back and read that sentence again. Okay one more time. We could afford it. Not in the hey if we just stretch ourselves a little bit and maybe I work a little overtime each month kind of afford it. Not the I’ll just put the groceries on my emergency credit card kind of afford it. No, we could afford it without changing our lifestyle or our financial goals one single bit. That kind of we can afford it. If it hadn’t been that kind of afford it, we wouldn’t be driving a Tesla. It is just that simple. And no, I’m not saying because you can afford something you should buy it, but if it’s something that will bring you immense value AND you can afford it, well it’s something worth considering.

So now you probably think, okay these people are just rich. Nope, I assure you we are not rich in the traditional sense of having loads of money and nothing better to do with it. Although we consider ourselves very fortunate, we are just regular middle class people. So, how did we afford this vehicle then? The exact same way we were able to pay off our mortgage and retire in our early 30’s.

We lived and continue to live below our means……..waaayyyyyy below our means. Our pre-retirement budget had us living off of 20-25% of our income. We were either saving or paying off our mortgage with the remaining 75-80%. My entire income was going directly to paying off our mortgage. Half of Mike’s income was going into savings, and the other half was paying our lifestyle costs. In retirement we will actually have a higher lifestyle budget than we did when we were working. Woohoo!

I know many of you are looking at 20-25% and thinking how is that possible, how can anyone live off that portion of their income. But really, for anyone living and making a middle class income there is absolutely no reason you can’t live a reasonable and enjoyable lifestyle on that kind of money. You just have to pay attention to where your money is going. Way too many people cannot tell you where a huge percentage of their monthly income is going…..it’s just gone!

I won’t use hard numbers to define middle class, because frankly it really depends on the cost of living where you reside. Middle class income in Los Angeles, CA is going to be a lot different than in small town Ohio. But the lower you are in that middle class range, the lower your savings percentage is going to be. The higher you are in that range, the higher your savings percentage should be.

And what if you are barely hitting the middle class scale in your area? Well, honestly speaking if you are making a total family income that is on the low end of the middle class threshold, I won’t go so far as to say that you can’t achieve FF, but it will take much longer. This is simply because there’s a threshold for what you require to live reasonably whether you make $30,000 or $300,000. If you live in an area where a reasonable lifestyle costs $30,000 annually, and you only make $50,000 per year, it’s going to take you a long time to save enough money to generate the required income to sustain a $30,000 lifestyle in retirement. If that’s you, and FF is where you want to go, you need to start heavily analyzing how you can increase your income (which we’ll talk about in the next post).

But regardless of your income, the approach to living below your means is the same. Improve your spending habits (by identifying your wants vs needs, and knowing what you can afford), and cut costs. Start by looking at the big ticket items.

Housing. One of the biggest expenses in most peoples lives. Take a hard look at this category. Is your home meeting or exceeding your needs? Could you downsize or move to a less expensive area without having a significant negative impact on your lifestyle? Nine times out of ten people are stretched financially because they overbought on their home purchase. While I won’t suggest that everyone should look to pay off their mortgage, (we did because it was right for our circumstances), don’t look at a home purchase as a set it and forget it expense that you will just be paying for the rest of your life. It is still debt, and you should approach it as something to be eliminated as quickly as possible. The more you can reduce your monthly expenses, the less cash flow you will need in retirement! If you don’t own your home, still take a hard look at whether or not you really need what you currently have.

Taxes. This is a huge category that is so often overlooked. People pay out exorbitant amounts of money in taxes annually. Now I’m not suggesting you shouldn’t pay them, but you should take a hard look at how you can maximize your tax efficiency. Learn about the tax laws in your area and how you can use them to your advantage. Taking the time to educate yourself in this area will reap huge returns over your lifetime. While learning about it, also recognize that you will not have the time to devote to becoming a tax expert, and in this category I can’t recommend finding an expert strongly enough. Interview accountants, find yourself one that you work well with and who is highly competent in their area of expertise. Paying the up front cost of having an accountant has the potential to save you huge amounts of money, especially as you start to build diversified income streams. Seriously, find someone.

Vehicles. How many vehicles do you have? Could you eliminate one and bike, take transit or carpool to work? How expensive are your vehicles? Can you reduce those costs in anyway? If you have two, maybe get a small economy vehicle strictly for commuting? If you have one, do you need it? Could moving to an area with better transit, or closer to work potentially eliminate the need for a vehicle in your specific circumstances? Would getting rid of the vehicle result in a positive gain if there is an increase in housing costs by moving closer to work?

Insurance. All kinds. When was the last time you had a hard look at your insurance policies for your vehicle(s), house, or medical etc. Take the time to read them over. Know what you need, ensure you are adequately covered, and eliminate extra’s that you don’t require. Shop around. Often people with claim free histories can find companies willing to offer very competitive rates to gain your business. Make sure you are getting the best rate available for your needs.

Utilities. Start turning off the lights when you leave a room, turn your heat down a degree or two in the winter and your A/C up a degree or two in the summer. Cable TV. Do you really need it? Every hour of TV you watch is an hour that could be spent reading or learning a valuable skill, (or thinking about your financial situation!) We got rid of our cable TV three years ago and haven’t looked back once. We replaced it with Netflix at a much lower cost. Netflix forces us to intentionally select and watch a show rather than just mindlessly channel surfing (it’s amazing how much time you can waste watching shows you will never think of after you cancel cable….I’m talking about you HGTV!).

Home phones. Seriously……who still has these? Okay, maybe if you have kids who are at the age where they can stay at home alone but aren’t old enough to have a cell phone this is a good call. But I can’t think of any other reason to have one unless you’ve actually taken the bold step of eliminating your cell phone (if you have, bravo, I’m jealous….I’m just not quite there yet!). Internet is also a big expense. Make sure you are regularly checking promotional offers and rates of various companies.

Groceries. If you aren’t already, start meal planning. It reduces waste and your grocery bill at the same time. And it actually saves you time during the week when you get hit with that age-old question of what’s for dinner.  Assess how often you eat out for dinner, is it reasonable, or can you cut some costs there? We get take-out once a week. Usually Subway, pizza or similar, at an all in cost of about $30.00. We could cut that cost, but our older son looks forward to it (the younger is only just starting solids!), and Mike and I enjoy the break, so it seems reasonable to continue. We also plan it for a night when our oldest son has an activity so that it’s one less thing to sort out on busier days. What we don’t do is have $100.00+ meals out all the time, maybe a handful of times a year on special occasions. But by saving it for special occasions we really enjoy it when we do indulge.

All the extra’s.Start taking a hard look at how much household income goes on clothing, movies, activities, gym memberships, toys you don’t need etc. How much clothing do you really need? Try simplifying your wardrobe and buying more versatile items that you can wear and layer in all seasons. If you really want a designer item, look to purchase it on Craigslist or some other buy and sell site at a fraction of the cost. Need kids sports equipment? Definitely buy these items on Craigslist, you’d be crazy not too! Movies, how often do you really need to go? A handful of times a year is probably plenty! Buy the movie ticket/food bundles from Costco and save yourself 25% every time you go. Activities? How many can/should your kid really be in? Do they need to be running from activity to activity every night? Do they really enjoy that? Maybe a night at home sitting down and having dinner with the family would mean more to them than playing a third sport? Gym memberships? Last time I checked running is free and push-ups/squats etc can be done anywhere. Unless you get a huge amount of enjoyment out of the expenditure, get rid of it and pursue the free methods. Or swap it in for a family pass at your local YMCA or rec centre so that you can get more out of the monthly cost.

The way’s to cut expenses are endless. The bottom line is you should always be re-evaluating where your money is going, and deciding if you are getting sufficient return (value) on your investment (cost). If you’re not, cut it. If you’re not sure, cut it. Then see if you miss it.

This is not a one time process. You should be revisiting your expenses at least once every few months. Feel free to start small and incrementally cut your expenses. Baby steps are exactly how Mike and I got from spending about 60% of our income on lifestyle, to 20%. We were able to adjust to each cut, and frankly at every stage it didn’t feel like we were missing anything. Essentially we trained ourselves to enjoy a simplified lifestyle that cost only 20% of what we were making. In fact, it was an easier lifestyle and I think because we were paying attention to the cost vs. return of everything we did, we were and are enjoying ourselves MORE. What’s that old saying……quality vs. quantity…..in this case, absolutely true.

All that said, there remains one big question. What do you do with the money you save after you cut your expenses and reduce spending?

If you are just starting out, the simple answer is to do one of two things. Take the entire amount of any money you are saving and immediately use ALL of it to:

  1. Pay down your debt. AND/OR;
  2. Save it.

We will talk about how to approach debt re-payment and how/where to save your money in detail in future posts, but those are the two basic answers.

Each time Mike and I were able to save money, we turned around and upped our mortgage payment by the equivalent amount. Until we couldn’t up our payments anymore. When I had first thought about doubling up our mortgage payments, the idea seemed crazy. But over time and with incremental increases, we adjusted, and when we finally were paying double the amount each week, we didn’t even notice.

So moving forward, know what you can afford. It’s not just a question of do you have the money available or can you make the payment work. For every purchase big or small, ask yourself, is this a need or a want? If it’s a want, honestly ask yourself if spending the money will delay or negatively impact your ability to achieve your financial goals. If the answer is yes, it’s probably not a want that’s worth it.

Once you’ve got your spending habits in prime form, start the cutting process. Know that it’s okay to start small, this isn’t a one time thing and baby steps will snowball over time.

Most importantly. Know exactly where ALL your money is going and make sure that your return on investment is high.

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