Home Personal FinanceFinancial Freedom In 5 Simple Steps Financial Freedom Step 4: Live Below Your Means – Waaaay Below
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Financial Freedom Step 4: Live Below Your Means – Waaaay Below

by Phia @ Freedom 101

Everyday you hear people talk about how we should all “live within our means”. Yet 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 Financial Freedom, even living within your means isn’t going to cut it. You need to learn to live below your means. Way below.

The further below your means you can handle, the faster you’re going to reach Financial Freedom. But that doesn’t have to mean a total sacrifice of your lifestyle now. It doesn’t even mean living in a van.

Achieving the balance between a great life now, and an even better future, means learning to critically evaluate your spending habits. Recognize your needs vs. your wants, weed out what you truly get value from, and cut the rest.

Finding The Balance

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 Financial Independence 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? Two of the values I listed for Mike and I was taking steps to improve our impact on the environment, and increasing our time with family.

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 extended family ANYTIME I want.

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.

So we took all our wonderful reasons to want this vehicle and looked at a final determining factor.

Because of everything we’d done to reach Financial Freedom, 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. We had to wait a long time in order to reach that kind of “afford it”. But if it we hadn’t been able to make that kind of afford it work, we wouldn’t be driving a Tesla. It is just that simple.

Let’s Be Clear

Now I’m not saying because you can afford something you should buy it. But if it’s something that aligns with your values, provides or facilitates desired experiences, AND you can afford it, well it’s something worth considering.

So, how did we afford this vehicle? 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%.

When we were working, 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, dual 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!

Can Anyone Do It?

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 Manitoba.

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 Financial Freedom, but the reality is, it will take 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 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 Financial Freedom 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 livebelow 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.

Choose The Right Housing

It’s 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.

Streamline Your Taxes

This is a huge category that is so often overlooked. People pay out exorbitant amounts of money in taxes annually. I’m definitely 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 – Do You Need Them?

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?

If you have two, do you need them both? Can the second be 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 net gain if there is an increase in housing costs by moving closer to work?

Insurance – How Much Should You Really Have?

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.

Downsize Your 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 setting 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 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, 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 companies in your service area.

Provider hopping can seem like a pain, but realistically for the investment of a 20 minute phone call, it can save you hundreds of dollars annually.

Reduce Food Cost – Without Reducing Your Nutritional Value

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.

Try cutting out meat! Our at least cutting down on how much meat you consume. This can create room in your budget for high quality produce, AND save you some money.

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 kids really look forward to it, 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! Employ some advance planning and buy the movie ticket/food bundles from Costco to 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 home gym, or a family pass at your local YMCA or rec centre so that you can get more out of the monthly cost.

The Bottom Line

The way’s to cut expenses are endless. But examining those categories are a great way to start to live below your means. But it’s not a one time game. We should always be re-evaluating where our money is going. Deciding if we are getting sufficient return (value) on our investments of time and money.

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 a thing. 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.

What To Do When I Start To Live Below My Means?

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.

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