Pam Krueger: Hi everybody, I’m Pam Krueger. I’m the founder of Wealthramp, and I’m joined today by Matt Roberts who’s […]
Billionaire Warren Buffet still lives in the house he bought in 1958 for $31,500. Mega-star Keanu Reeves is worth over $350M but says he’s happier living a modest lifestyle rather than in a Hollywood mansion. In fact, he didn’t own a home for many years after he became a famous, high-paid actor. And Virgin Group mogul Richard Branson admits he doesn’t waste money on possessions and clothes.
“The idea of having a possession that is there just as pure luxury, and is not actually paying its bills, is something which I’d be embarrassed about.” Branson told The Guardian in a 2002 interview.
Being frugal and living below their means has helped some of the world’s wealthiest people build their wealth. Living a smaller lifestyle is a personal choice each of us makes (consciously or unconsciously) from the day we start living on our own and then throughout the rest of our lives. What does it mean to live below your means? To put it simply, it’s continually spending less than you earn. It becomes a habit or a behavior pattern that allows you to resist buying things you may want but don’t need and putting more of your income into your savings and retirement.
There’s a payoff to living below your means. Most of all, you reduce stress over money issues. You’ve also put yourself in a position to not live paycheck to paycheck. Living debt free gives you power because you always know if/when you do want to borrow money, you’ll be able to negotiate the best terms on a loan.
But there’s more to living frugally:
Living paycheck to paycheck can cause you to lose a lot of sleep worrying about your finances. But if you are financially frugal about what you spend your money on, then you should have more money available to pay off your debts, save for emergencies, and build your nest egg for retirement. You’ll get rid of much stress and worry if you are more financially secure.
If you cut back on unnecessary expenses like clothes or $5 lattes at the local coffee shop, you can allocate the money you save into an emergency fund. Experts recommend that you sock away at least one to three months of expenses in an emergency fund in case something unexpected happens, like losing your job or having a major expense you hadn’t planned on.
By spending less on eating out at restaurants or buying the latest and greatest cell phone, you can invest the money you save to grow your wealth. One way to do this is by contributing more to your 401(k) or other retirement accounts. Seemingly small expenses add up. Being mindful of expenses also means you may become more vigilant about the fees you pay whenever you make an investment. Learning to ‘audit’ investment expenses such as management fees can save you literally tens of thousands of dollars over a lifetime of investing. When you switch your priorities from spending to saving, you’ll get more control over your future.
Living below your means is more about behavior than finance. Age and stage of life don’t really matter. If this lifestyle appeals to you, there are strategies that you can take to get on the path of living a financially frugal life.
One of the best things you can do to live frugally is to set a budget for your monthly expenses and stick to it. Ironically, placing limits on your spending and tracking your expenses allows you to free your mind of questions about whether you may be overspending. There are several budgeting programs, apps, and models that you can use to follow where you’re spending your money and where you might be able to cut back. For example, some budgeting experts recommend the 50/30/20 rule, where 50% of your income goes to necessities like rent and utilities, 30% goes to wants like dining out and clothes, and 20% goes into savings or paying off debts.
Financial guru Dave Ramsey has been promoting the You Need A Budget (YNAB) budgeting app, and I have personally test-driven (and endorsed this digital tool), which gives a purpose for every dollar you earn. With zero-based budgeting, you should be left with zero after you pay all your expenses, including needs, wants, debts, savings, and retirement.
Research shows that the average adult in the U.S. spends almost $1,500 a month on things considered ‘nonessentials.’ These unnecessary expenses can include dining out, expensive clothes, multiple streaming services or subscriptions, pricey gym memberships, and alcohol. With current inflation rates still hovering around 7% annually, these everyday luxuries are taking an even bigger bite of your wallet. You don’t have to deprive yourself of a vibrant social life, but you may be surprised by how much you can save just by cutting back on some of these costs.
If you have a lot of credit card debt, much of your monthly payments go to pay the interest on those cards. With some credit cards charging as much as 26% interest, paying a credit card off can take years if you only make the minimum payments.
Make a plan to pay off your credit card debts, so you have more money to save and invest. One strategy for paying off your cards is the avalanche method, where each month, you pay the most on your card with the highest interest rate and minimum payments on your other cards. Once you pay that card off, do the same with the card with the second-highest interest rate.
If a large chunk of your income goes to housing or your car, you may consider downsizing. If you live in a five-bedroom home, but all your kids have grown and moved out, you can save money moving to a smaller home. Living in an urban area may be nice because you’re close to everything, but you may get more for your money on housing if you move outside the city limits.
You can also save a lot by not having a car payment. Your vehicle is a form of transportation to get you to the places you need to go, not a symbol of your status. It’s silly to drive around in a brand-new car when you struggle to make ends meet.
Just like anything else, living below your means involves finding the balance to feel more at ease about money. Taking the frugal lifestyle to its extreme– counting every penny and living in fear of spending your own money isn’t necessarily healthy and probably won’t make you (and those around you) very happy. There’s frugal, and then there’s cheap and being too restrictive might rob you of the job of participating in group activities where you have to chip in or feel generous enough to donate to charitable causes.
If you worry about your future financial security, the new year is a perfect time to reevaluate your spending and look at ways to cut back on unnecessary expenses. If you’re a parent or grandparent who has life experience, it’s smart to sit down with your loved ones and talk about how they can find some peace of mind that they are prepared for any unknowns the future may bring.
Finding the right financial advisor can be challenging. Let Wealthramp help you find the right advisor who will help you with your personal financial needs and situation.