I’ve managed to learn a thing or two about what it takes to win financially over the past few years and I’m still learning. It’s hard for me not to roll my eyes when I hear financial advisors going on and on about the details, as if personal finance is complicated. I’m sorry all, but I feel like I have this figured out. The only personal finance advice any of us needs is, LIVE BELOW YOUR MEANS. Yes, it’s that simple.


Live Below Your Means. Spend Less Than You Earn. Live on LESS.

I’m not sure why this so complicated. So many of us are broke, and we can’t seem to figure out why. It doesn’t take a Ph.D to figure this out. If we spend everything we make, we struggle. If we spend more than we make, we make it impossible to make any forward progress. But if we spend less than we make, the needle starts to move.

Normally, I would add a disclaimer that says, “This is for entertainment purposes. This should not be taken as financial advice. You should consult with a financial professional for your specific needs”. But if you live below your means and it bankrupts you, feel free to sue me, cause there’s no way that this won’t work.

Okay, so duh, you knew that. But you still aren’t putting away huge chunks of money every month you say? Well…

It Starts with an Income

First of all, you’ll need a source of income. You can’t live below your means if you don’t earn an income. Living below your means by definition is living below your income. It means living on less than you make. So step one, get yourself an income.

And it can’t be a tiny income either. I live pretty modestly and still end up spending between $20,000 and $25,000 per year. And that’s just for me. A family living modestly will likely need to spend more than that. Mr. Money Mustache, a popular personal finance blogger, known for his strategically low cost lifestyle, spent $25,046 last year with a wife and a young child. These are very low numbers compared to the typical person. According to this data by the U.S. Bureau of Labor Statistics, the average household had annual expenditures of $49,067 in 2009. That means my spending is less than half the average household spending and Mr. Money Mustache’s family’s spending is just above half.

So let’s say you’re smarter than the average U.S. household and spend far less than they do at just $40,000 per year. Just to break even, you’ll need to earn at least $40,000 after taxes, which is likely a gross income of close to $50,000. That’s not a small income and many young adults aren’t earning that much. So even if you spend far less than the average family, you need to be earning $50,000 to break even. Income level is important to being able to live below your means.

If you’re income isn’t at a respectable level, you should ask yourself how hard you’re trying to raise it. Are you playing a little too much Call of Duty? That may be why. Are you going out with your buddies more than you’re reading, learning or working? That could be why. How are you furthering yourself? I’m not a believer than you can only further yourself by going back to school. If you’re broke and already have a college degree, how will going back for another degree and going into debt (or more debt) to do it help you? I hate to be the one to say it, but it may …um….. hurt.. you. In my experience, the more strategic you think about your future and the more you learn and apply from what you learn, the better. And there is no charge for learning. It’s free.

Income. You’ll need it at a respectable level. Use every angle you have at your disposal to bring in a respectable income. And once you have it, protect it with everything you got. That income is how you’re going to make it. It’s how you’re going to pay off your debt. Eventually, it will be how you pile up a bunch of cash so you can do crazy things like buying your first (or next) home in cash, starting a business that you LOVE, or reaching financial independence and retiring early. I’m on track for… well.. all of those.

Income…check. Kicking butt at your job and making yourself indispensable…check. Now what?

Now, Live This Way… For a Long Time…

Now for the boring part. You’re going to cut your lifestyle to the bare bones and learn to live below your means. Cable TV is a thing of the past. Shopping isn’t happening anymore. Your grocery budget will rise as you will be cooking 90% of your meals at home and bringing lunches to work. You’ll need to set yourself up with a Mint.com account to track every single dollar that you bring in and that you spend each month. You’ll need to study your Mint.com account daily to find every possible cut you can make in your monthly spending.

And once you’ve cut your spending to the bare bones, you….live. You live for many, many years this way. It gets boring. You’ll be telling your friends “no” so many times that a few of them with unfriend you. That’s okay though, they weren’t real friends anyway. If you’ve successfully cut your expenses and started to live below your means to the point that you’re living on less than half of your take home pay, congratulations, you’ll reach financial independence in 17 years. If you’re able to cut further and can live on only 25% of your take home pay, you will be financially independent in only 7 years.

Just for fun, let’s compare that to the average household. They make $62,857 BEFORE TAXES (which means they likely net much less) and spend $49,067 per year. Let’s give them the benefit of the doubt and say they are able to save 10% of their income. At that rate, they will be financially independent in 51 years from the time they started.

Fifty one years. That’s how long it will take to save for retirement at that rate. Now, sure, leveraging tax advantaged accounts like IRA’s and 401k’s, etc. will speed that up a bit, but this kind of living will take anyone forever to make progress on.

The average household doesn’t understand that to succeed financially, you need to live below your means. If you want to make serious financial progress, you need to live WAY below your means and start now. This is what I’m doing and it’s what I would recommend to everyone. If you want to win financially, you need to live below your means. It’s as simple as that. Spend less than you make.