Living below your means

Living below your means is a way to be mindful of how you spend your money. It means that you should strive to spend less than you earn. In other words, you should have money left over at the end of the month. This left over money can be used to build an emergency fund and then as savings to invest. If you do this correctly, you won't deprive yourself of the things you really need to be happy.

Establishing a household budget can be an important step in living below your means as it provides visibility on income and expenses.

But living below your means means more than just balancing your budget. Being aware of the difference between what you need and what you want is fundamental.

The big picture

Main article: Savings rate

You need to save a significant portion of income every month to have enough money for a comfortable retirement. It is a long game: you should consistently set aside a portion of earnings for decades. If you don't save enough, no amount of financial trickery will provide the returns needed for a comfortable retirement. There is no substitute for spending less than you earn.

You might spend one third or more of your adult life in retirement. For many people, government pensions (and benefits) and workplace pensions alone will not cover their expenses in retirement (see Canada's retirement income system). The additional income during retirement will need to come from savings/investments, i.e. your financial assets:

If you are spending more than you earn during your working years, you are depleting your assets, or going further into debt, rather than accumulating capital for later. You need to balance the needs of your future self with your current needs and wants. While that last sentence may initially sound a bit like psychobabble, if you think about it, then it nicely sums up the problem that some/most people have with saving money.

Because saving money does not come naturally for many people, and spending it is very easy, you might need some strategies, tricks and tips to help you spend less than you earn, which is what the rest of this article presents.

Maintaining a balanced budget

Main article: Budgeting

Individuals establish a household budget in an effort to understand their cash flow - how much they make and how much they spend. A budget is a tool that can help individuals plan for desired purchases and establish savings for reaching financial goals. Budgets are often essential for people who desire to keep spending under control.

Adjusting your perspective on spending

A list of example action points to consider:

1. Distinguish between what you want and what you need
2. Don't try to keep up with the Joneses
3. Change your definition of what it means to be "rich"
4. Know that spending less money will not decrease your quality of life
5. Be grateful for what you do have

Ideas for reducing expenses

The internet and your friends are full of specific tips on how to reduce expenses. Use those ideas that make sense to you.

Examples include:

Accommodation

• Could you lower your housing costs without decreasing your life satisfaction?
• Compare the costs of owning vs renting
• Is that home improvement project a need or a want?
• Use less energy (e.g., use less heat or air conditioning when you're sleeping or away from home)

Transport

• Walk or bike to work or to the store
• Explore public transit options in your area
• Look at reliable used cars
• Pay cash for your next vehicle (car loans can be expensive)
• If your family has two cars, can you get rid of one?

Food

• Eat at home whenever you can
• Pack your lunch to work
• Plan your menu for the whole week before going to the supermarket
• Buy generic brands
• Look at the Credit Counselling Society's "12 Ways to Save Big on Groceries"

Clothing

• Stop buying clothes for a while. Will people actually notice?
• Look the Credit Counselling Society's "24 ways you can save on clothes"

Shopping

• Wait for sales, but don't buy things just because they're on sale
• Don't shop without a list
• Wait 48 hours before making a big purchase
• Borrow items whenever you can
• Consider quality second-hand items

Entertainment

• Cancel the subscriptions you don't need
• Find enjoyable free or low-cost activities
• Entertain at home instead of going out
• Use the public library
• Take advantage of free admission times at museums

Communications

• Call your service provider to negotiate the best package
• Would a less expensive cell phone plan suffice?

Financial costs

• Pay back your debts to save on interest costs
• Pay "cash" for your purchases, avoid credit (unless you pay your credit cards off fully every month)
• Could your lower your insurance costs by shopping around for less expensive coverage?
• Look at low-cost banking options
• Avoid unnecessary fees, including those related to not paying bills on time

Automating your savings

Some people don't follow a budget and will spend whatever lands in their bank account. This might still work if you "pay yourself first", i.e. automate your savings. If money is transferred automatically and regularly from your chequing account to wherever it needs to go (RRSP, TFSA, savings account, etc.), you will in effect be living within your means, as long as you don’t spend more than what is left.

See also

• Getting started
• Managing debt