How to Save $1M by Living Below Your Means

“How do I learn to live below my means?” has to be the most common question I get from virtually every person I know, from the broke college kid working part time in between a heavy course load to the $250K annual earner who is living paycheck to paycheck trying to keep up with a lifestyle that crept up out of nowhere. We all feel the burden of this, at every income, at every age. It may be one of the most uniting dilemmas of our time, actually. I want to take the time to address this thoughtfully and carefully, because I think that most of us sincerely want to live beneath our means- it is, after all, the end-all key to financial freedom.

First, I will tell you that entrepreneurship is the best training ground out there for living on less than you make, because you’re earning something different every day, week and month. When starting out, it is a serious challenge. I have always had an inclination toward responsible spending behavior, but starting my own business really cemented the deal- my “lowest possible income” each month was a click above zero, so budgeting was a beast. However, it was great practice, because up until last year, my annual spend had remained the same for 5 years, and was barely higher than it was for the 5 years before that. I was afraid to “need” more in my budget, because I was never really sure how the business would do, or how it would cashflow month-to-month, so I tried to keep everything low. In the end, I was living on less than $75K per year through last year, despite my income increasing dramatically over the years. I wasn’t suffering for it either- I lived in a beautiful, updated home on the water, drove a relatively new car, and had a boat in my backyard. But I was mindful to keep every purchase and obligation under wraps, looking for something to give up if I wanted something new, so that my bottom line remained about the same. The result of that is lots of savings, and simple, disciplined spending. The bottom line you’re looking for here is YOU controlling your spending, instead of your spending controlling YOU.

My dad used to tell me that every money problem is a spending problem. You simply cannot out-earn undisciplined spending. And he was right. If you’re looking at your financial picture and you want to maximize that spread between the money going out and the money coming in, always look at the money going out first. Every person and family is different, but simple budgeting really helps, more than most people realize. I figured out that I was spending $190/mo on cable when I really only watched a couple hours of TV per week. I traded that cable bill for Netflix and a streaming cable service totaling about $30/mo combined, netting a savings of $160/mo and sacrificing zero lifestyle. Start by looking at things you’re spending money on that you’re not GETTING anything from. How often are you eating out? Do you know about boxed wine that’s actually delicious and keeps your wine good for a month? Do you watch that cable TV you’re paying for? Have you considered using a points or miles credit card to buy your regular essentials so that your hotels and flights are free when you travel?

Budget for your frivolous spending. We all do it- we had to have that thing- whether it was clothing, a pet, jewelry, new sunglasses, new wheels for the car, vacation, a bathroom remodel, a boat or RV, etc. These things don’t have to be budget-busters. Just figure out how much you are willing to spend on these things each year, and divert a little bit of money each month into a savings account just for that. When you want to make the purchase, the money is there, and you can have your splurge guilt-free. Or you don’t touch it so that you can have more next year. This is another step in being in control of spending- you have to live a little, but do it without incurring debt, guilt, or a fight with your spouse.

When I work with my friends on reducing spending, we always begin with a 1-2 month period of tracking. Keep track, just for a few weeks, of where every single dollar goes. Try to figure out where you can scale back spending by between 10-20%. If your household income is $75K per year, we’re talking $7-15K- it’s not nothing! But, $100/mo is over $1,000 per year, so if you can find 8 things to save $100/month on, you’re there. And the first $200-300 can be done before you even give up anything you’ll notice- just eliminate the things you don’t value or use. Then squeeze out a few other things- maybe eat at home 4 extra times per month, and set a rule that you only meet for beers after work at places with Happy Hour so you can get out of there for $20 or less. It adds up fast. If you need some ideas, see our 100 Ways to Save $100 per Month here.

The thing that we all get hung up on this part is not wanting to have live like we’re broke- and we don’t have to. We waste a lot of money paying for goods and services that mean little or nothing to us, especially in this world of monthly payments for everything. Just focus on the things that don’t make you cringe, for now.

The next step is increasing income- WITHOUT increasing spending. If you’re an entrepreneur or business owner, how will you grow next year to increase net income by 20%? If you’re an employee, what is the next promotion or raise coming your way? Can you earn more commissions this year? Is a job change or career move something you can or should consider? If you’re happy in your job and position, when will your next regular pay raise be, and how much will it be? Start thinking about these opportunities now, so that you’re totally prepared when it happens (it always happens eventually). When you do get that raise, or other increase in income, divide it in half. Half of it is to increase your lifestyle (you earned it!), and the other half is to increase your savings. You’ll never miss it, and your future self will thank you.

The median household income in the US is around $60K, and has remained pretty stable around that number (once adjusted for inflation) for the last few decades. Wage increases average just over 6% per year, or we’ll say 3.2% when adjusted for inflation. If a 30-year-old family earning $60K per year can find a 10% reduction in their spending to invest monthly, and invest half of every raise they get until they retire (this is assuming basic cost of living raises, and does not account for promotions, job changes, etc. that result in larger pay increases), they will have saved an astonishing $1.7 MILLION- and this is on top of anything else they’re already doing.*

The best news in all of this is that you don’t have to move mountains to prepare for your future. You don’t have to starve today to prosper later. Even if you are starting “late” in the game, or have debt to pay down, small habits lead to large outcomes. Treat your money with the dignity it deserves after you worked so hard to earn it. If you want that latte, or that nice bottle of wine, and it means something to you, and it has the VALUE of the hard work you put in to earn it- do it. You can have the things you value and have your retirement account too.

*Assumptions are savings of 10% of $60K salary with 1.6% annual increases, 8% market return, and retirement at age 65.