Living Below Your Means: How to Spend Less and Live More

Living below your means is simply spending less money than you earn each month so you have money left over for savings, investments, and your future goals. 

7 Steps On How To Live Below Your Means

These steps work best when you follow them in order because each one builds on the previous step to create a complete system.

Step 1: Calculate your real take-home pay

The biggest mistake people make is using their gross salary for financial planning instead of their actual take-home pay. This single error explains why so many people feel broke despite earning decent money. Banks and financial advisors often use gross income calculations, but you pay bills with what actually hits your checking account after taxes, benefits, and deductions.

Why gross income calculations will keep you broke

Banks approve you for mortgages based on your gross income, but those monthly mortgage payments come out of your take-home pay. A $100,000 salary sounds impressive until it becomes roughly $75,000 after taxes, benefits, and retirement contributions get deducted. That $25,000 difference creates a massive gap between what you think you can afford and what you actually can afford.

This disconnect between gross and net income creates a false sense of financial security that leads to overspending. People make purchasing decisions based on their gross salary, then wonder why they feel financially stretched despite earning what seems like good money. Always use your actual monthly take-home pay as the foundation for all spending decisions because your gross salary represents money you'll never see.

How to find your true monthly income

Most people have no idea what they actually bring home each month because they focus on their annual salary rather than the monthly reality of their bank account. This creates a disconnect between perceived and actual affordability. Here's the simple process to calculate your real spending power:

• Add up your last 3 months of actual deposits into your checking account, excluding any one-time payments or irregular income.
• Divide by 3 to get your average monthly take-home pay that reflects your true spending capacity.
• Don't include irregular income, such as bonuses, tax refunds, or money from a side hustle, in this baseline calculation since you can't rely on it.
• Use this number as your foundation for all future spending decisions, not your gross salary or what you think you make.

Here's how it works in practice with real numbers:

• Month 1: $4,800 deposited
• Month 2: $4,650 deposited
• Month 3: $5,100 deposited = $14,550 total
• $14,550 ÷ 3 = $4,850 average monthly income

Write this number down and keep it visible as your financial north star. This becomes the basis for every financial decision, from housing to car payments to your daily spending habits.

Step 2: Track where your money actually goes

Most people have no clue where their money goes each month. They'll spend 30 minutes researching the best price on a $20 item but never look at where their $4,000 monthly income disappears. This lack of awareness makes it impossible to make intentional spending decisions that align with your values.

The 80/20 of expense tracking that matters

The 80/20 Rule (also called the Pareto Principle) means that 80% of your results come from 20% of your efforts. In spending terms, 20% of your expense categories will most likely account for 80% of your total spending. This means you can focus your energy on the categories that matter most and let automation handle the smaller details.

The key is finding the right balance between awareness and action without getting overwhelmed by every transaction. You want to track your top 10 spending categories, not every single coffee purchase. 

Modern finance tracking apps can categorize 90% of your spending automatically, which saves you time and mental energy while still giving you the insights you need. Look for patterns over 3-6 months rather than daily fluctuations that create anxiety and decision fatigue.

The goal is awareness and pattern recognition, not perfection or judgment about past spending. You're looking for where your money flows naturally so you can redirect it intentionally.

The "Big 3" expenses that control your financial life

Housing, transportation, and food typically account for 60-70% of most people's spending, which means they have an outsized impact on your financial future:

• Housing: Moving from a $2,200 apartment to a $1,950 apartment saves $3,000 annually, which could fund a vacation or boost your investment account.
• Transportation: Buying a reliable $15,000 used car instead of a $35,000 new car saves $20,000 upfront plus $300 monthly in payments, freeing up $23,600 in the first year alone.
• Food: Meal planning and cooking 5 nights weekly instead of ordering takeout saves $300+ monthly, which equals $3,600 annually for your Rich Life goals.

These three categories determine whether you live paycheck to paycheck or build wealth effortlessly. Everything else is optimization around the margins that won't fundamentally change your financial trajectory.

Step 3: Apply the Rich Life 80/20 rule to your spending

Finding your Rich Life is where living below your means gets exciting instead of restrictive. Rich people spend more on things they love than most people spend on anything. The secret is being ruthless about cutting spending in categories that don't matter to you.

Spend extravagantly on your money dials

Money dials are the specific spending categories that bring you disproportionate joy and align with your Rich Life vision. They're called "dials" because you can turn up your spending in these areas without guilt, knowing they genuinely enhance your life. Everyone has different money dials based on their values and what makes them happy.

Common money dials include travel, dining out, fitness, personal development, family experiences, or hobbies. Identify what truly brings you joy versus what you think should bring you joy. 

Once you identify your money dials, spend freely and without guilt in these areas. This prevents the deprivation mindset that causes most people to abandon their financial plans within months. Allocate 10-20% of your income to these categories for guilt-free spending that enhances your life.

Cut costs ruthlessly on everything else

Rich people are often surprisingly cheap in categories they don't care about. This intentional approach to spending means your money goes toward what matters most to you. 

Identify categories that don't align with your values and minimize spending aggressively. Use the "Would I buy this again?" test for recurring expenses like subscriptions and memberships. Automate these decisions to remove willpower and daily decision fatigue.

Warren Buffett lives in the same house he bought in 1958 and drives modest cars, yet he spends freely on things that matter to him, such as quality time with his family and supporting causes he believes in.

The money dial worksheet

This simple exercise will revolutionize your approach to spending:

• List your top 5 spending categories from the past 3 months based on your tracking data.
• Rate each category 1-10 based on how much genuine joy and value it brings to your life.
• Categories rated 8-10 become money dials where you'll spend freely without guilt.
• Categories rated 1-5 become targets for aggressive cost-cutting to fund your money dials.

Here's what this looks like in practice:

• Travel (10)
• Dining out (9)
• Clothing (3)
• Car payment (2)
• Gym membership (8)

This person should increase their travel and dining budgets while purchasing more affordable clothing and a less expensive car. The gym membership stays because it genuinely enhances their life and health. Review this quarterly, as your values and priorities may change over time.

Step 4: Master the big purchases framework (where most people lose the game)

Big purchases are where living below your means is won or lost. Get a house or car purchase wrong, and no amount of small optimizations will save you.

The 125% rule for major purchases

The 125% rule is simple: before making any major purchase, multiply the price by 1.25 to see the true cost. This accounts for all the hidden expenses that come with big purchases that most people never consider.

Houses require maintenance, furnishings, and property taxes in addition to the mortgage payment, which can add 25% to your first-year costs. Cars require insurance, maintenance, and repairs that dealerships often overlook when calculating affordability. This buffer prevents you from becoming "house poor" or "car poor" after major purchases by ensuring you can handle the total cost of ownership.

Here's how it works with real numbers:

• A $300,000 house means you should be comfortable spending a total of $375,000 in the first year.
• The extra $75,000 covers closing costs, immediate repairs, furniture, and unexpected issues that inevitably arise.
• Without this buffer, you'll end up charging necessities to credit cards or depleting your emergency fund.

This rule transforms how you think about affordability by revealing the true cost of major purchases before you commit.

Think in cash, not monthly payments

Monthly payment thinking is designed to make you spend more money than you can afford. A $50,000 car on a 7-year loan feels like a $700 monthly decision instead of a $50,000 purchase. This psychological trick makes expensive purchases seem affordable when they're actually budget-busting.

Before any major purchase, ask yourself: "Would I pay this full amount in cash today?" If the answer is no, the monthly payment is irrelevant. The exception is mortgages and business equipment where the monthly payment analysis makes sense for cash flow planning.

The opportunity cost question

Every dollar you spend is a dollar you can't spend on something else. Making this trade-off explicit helps you make better decisions aligned with your actual values rather than impulse purchases driven by emotions or sales pressure.

The difference between a $25,000 and $45,000 car is $20,000 that could fund 4 amazing vacations or significantly boost your investment portfolio. Make the trade-off explicit instead of hiding behind monthly payment math. Choose based on your Rich Life values, not what the salesperson says you can "afford."

Step 5: Automate your Rich Life money system

Willpower doesn't work for money management, so you need to automate your system. Set this up once and your money automatically supports your Rich Life without requiring daily decisions.

The 4-bucket system for effortless money management

The Conscious Spending Plan ensures every dollar has a purpose before you can spend it unconsciously. The percentages are guidelines that you can adjust based on your situation and life stage, but always allocate intentionally:

Fixed costs (50-60%) include rent, utilities, insurance, and minimum debt payments. Investments (10%) go toward your 401k, Roth IRA, and index funds for long-term wealth building. Savings (5-10%) cover your emergency fund, vacation fund, and house down payment. Guilt-free spending (20-35%) handles everything else, including your money dials and daily expenses.

Set up automatic transfers to remove willpower

Automation prevents the monthly debate about whether you can "afford" to save or invest. When money moves automatically, you adjust your lifestyle to what remains rather than hoping to have money left over after expenses.

Set up direct deposit to split your paycheck into different accounts automatically: 

• Fixed costs get deposited into one checking account for bills.
• Investments get allocated to retirement accounts before you can spend them.
• Put your savings in high-yield accounts, where you can open separate accounts for different goals.
• Guilt-free spending gets its own account where you can spend freely without affecting other financial goals.

The "pay yourself first" mindset shift

Most people pay everyone else first, then save whatever's left over (which is usually nothing). Rich people flip this script and pay themselves first, then live on what remains. Investments and savings happen automatically before any discretionary spending.

This mindset shift transforms your relationship with money because you're prioritizing your future self alongside your present needs. You're not hoping to have money left over for goals; you're ensuring it happens first.

Step 6: Optimize your Big 3 expenses like a rich person

Housing, transportation, and food typically make up the bulk of your monthly expenses, which is why it pays to optimize them.

1. Housing: the make-or-break category

Housing is the biggest expense for most people, which means it's also the biggest opportunity to free up money for your Rich Life. Some options to consider are:

• Keep total housing costs (rent/mortgage + utilities + maintenance) under 28% of gross income to avoid becoming house poor.
• Swap a $3,000 suburban home for a $2,200 downtown condo near work and hobbies — and free up $9,600 a year for investments or experiences.
• Downsizing or house hacking to cut $500 from your rent each month adds up to $6,000 annually — money that can go straight toward your Rich Life goals.
• Buy a duplex, live in one unit, and rent out the other to lower your housing expenses.

In short, paying for location often saves time and money on commuting — and brings you closer to the people and experiences you value most. Small housing tweaks can also unlock major improvements in your cash flow.

2. Transportation: stop driving your wealth away

Cars are the biggest wealth destroyer for most people. They're expensive to buy, costly to maintain, and lose value every year the moment they leave the lot. The average car payment is $700 monthly — a figure that doesn't include gas, insurance, repairs, parking, or registration. 

All in, car ownership can easily exceed $10,000 a year. If that $700 monthly payment were invested instead, it could grow to over $1.2 million in 30 years. 

That’s the difference between struggling to get ahead and building lasting wealth. This single insight should fundamentally shift how you think about transportation. Choosing to bike, use public transit, carpool, or drive a reliable used vehicle can put thousands back in your pocket each year — and millions over a lifetime.

3. Food: spend on experiences, save on groceries

Food spending can easily spiral out of control with constant takeout and delivery, but it's also where you can make meaningful changes without feeling deprived:

• Meal planning and cooking at home can save $400+ monthly compared to constant takeout, which equals $4,800 annually for your Rich Life.
• Spend on amazing restaurant experiences that create memories, not convenience food that you'll forget within hours.
• Buy generic brands for basics and splurge on ingredients for dishes you truly enjoy preparing and eating.

The goal with optimizing your spending on food is to be aligned with your values, not across-the-board cheapness that makes you miserable.

Step 7: Build your Rich Life fund (the secret to never feeling deprived)

Traditional savings advice is boring and demotivating. Rich Life funds create excitement about saving because you're working toward specific goals that enhance your life rather than just accumulating money in a generic account.

The 50/50 rule for windfalls

Most people either blow windfalls entirely or save them all and feel deprived. The 50/50 rule creates a sustainable approach that satisfies both your future self and present self.

When you receive raises, bonuses, or unexpected money, split it evenly between two purposes. Half goes toward long-term goals like investing or debt payoff, which builds your financial foundation for the future. The other half goes toward immediate Rich Life spending or upgrading your lifestyle, which ensures you enjoy some benefits today and don't feel like you're constantly sacrificing.

Apply this to raises too: if you get a $200 monthly raise, automatically save $100 and enjoy $100. This creates sustainable progress without extreme sacrifice in either direction.

Automate contributions to make it effortless

Small, consistent contributions to specific goals create momentum and prevent the monthly debate about whether you can afford to save. Start small and increase over time as your financial situation improves.

Set up automatic transfers to Rich Life funds the day after payday so the money moves before you can spend it. Start with small amounts, such as $25-$50 per month, to build the habit without feeling the impact. Increase contributions when you get raises or eliminate other expenses. Celebrate milestones to maintain motivation and acknowledge progress. When you reach a goal, immediately redirect that money to a new Rich Life objective.

How to Start Living Below Your Means This Week

Getting started doesn't require perfect planning or complex systems. Take action on these four weekly steps, and you'll build momentum toward your Rich Life while developing sustainable financial habits.

Week 1: Calculate and track

The foundation of living below your means is getting clear on your real financial situation. Most people operate on guesswork and wonder why their finances never improve:

• Find your real monthly take-home pay using the past 3 months of bank statements, not your gross salary.
• Set up automatic expense tracking through apps or bank tools if you don't have it already.
• Don't change any spending habits yet, just observe where money currently goes without judgment.
• Write down your actual take-home pay and post it somewhere visible as a daily reminder of your real spending capacity.

Export 3 months of transactions and categorize them to see your spending patterns. Look for surprises: most people underestimate their spending by 20-40% in major categories. This awareness alone often creates positive changes in spending behavior.

Week 2: Identify your money dials

This week focuses on consciousness and intentionality. You'll discover what actually brings you joy versus what you spend money on out of habit or social pressure.

Review your spending categories and rate each 1-10 for value and joy. Choose 1-3 categories as money dials where you'll spend freely. Identify 3-5 categories where you'll cut costs aggressively. Be brutally honest about what actually brings you happiness versus what you think should bring you happiness.

Week 3: Optimize one Big 3 expense

Now you'll create real money to fund your Rich Life goals. Focus on one significant change rather than trying to optimize everything at once. Small changes in major categories yield significant results.

For housing, call 3 internet/cable providers for better rates, or list a spare room on Airbnb for additional income. Transportation changes could include selling an expensive car and buying a reliable used car, or exploring car-sharing apps if you live in a city. Food optimization might involve meal planning for one week and tracking the savings compared to your usual spending patterns.

Week 4: Automate your system

Set up separate accounts for fixed costs, investments, savings, and guilt-free spending. Create automatic transfers to move money into appropriate buckets on payday. Start contributing to one specific Rich Life fund, even if it's just $25 monthly. The key is establishing the system and building the habit, not the dollar amount.

Common Mistakes That Keep You Stuck Above Your Means

Watch for these mistakes because they sabotage your progress and keep you spinning your wheels instead of making real financial progress.

Trying to cut everything instead of focusing on big wins

Most people burn out trying to optimize small expenses, all while ignoring the big categories that actually shape their financial future. The real gains come from focusing on decisions that move the needle — not the ones that just feel productive.

You might spend three hours trying to shave $20 off your monthly phone bill, yet continue making a $700 car payment without question. Or clip coupons to save $30 a week, while $400 quietly drains from your account each month for unused gym memberships and forgotten subscriptions. You might even buy generic toilet paper to save $5, while financing a $60,000 luxury car that’s losing value every day.

The math makes it obvious: a $700 car payment costs you $8,400 a year. Meanwhile, that phone bill tweak saves just $240. But reduce your car payment by $200 a month, and you’ve instantly freed up $2,400 a year — no coupon cutting required.

This is the difference between working hard on the right things and working hard on everything. Big wins come from identifying the few decisions that have an outsized impact, not from spreading your energy thin across every small expense.

Living like you're poor

Extreme frugality often leads to pendulum swings back to overspending because it feels restrictive and unsustainable. The goal is conscious spending that aligns with your values, not deprivation that makes you miserable.

Focus on earning more and spending wisely rather than just cutting costs everywhere. For example, eating rice and beans for months just to save money, only to end up blowing $2,000 on an impulse shopping spree because you feel deprived, isn’t going to move the needle much. A better approach is spending freely on food you love while cutting costs on things you don't care about.

Comparing your lifestyle to others instead of your own values

Social media and peer pressure create artificial spending pressures that have nothing to do with your actual values or happiness. Your neighbors' spending habits shouldn't determine your financial decisions.

Design your life based on what you want, not what others expect or what looks good on Instagram. Stop trying to keep up with others and start designing a life you actually want. This requires regular reflection on your values and the courage to live differently than your peers.

Not having a clear vision for your Rich Life

Without a compelling vision of what you're working toward, it's impossible to make good trade-offs between present spending and future goals. Vague financial goals like "save more money" don't provide enough motivation to change behavior.

Clarity creates motivation and provides a decision-making framework. Spend time defining what you want your life to look like in 5-10 years with specific details. Use this vision to guide spending decisions and resist impulse purchases. When you know exactly what you want, saying no to everything else becomes easy.

The Real Secret: Living Below Your Means Is About Living Above Everyone Else's

Living below your means is about having so much clarity on what you want that everything else becomes irrelevant. The real advantage isn't the money you save, it's the psychological freedom that comes from conscious spending:

• When you master conscious spending, you'll have more money for things you love than people earning twice as much who spend unconsciously.
• The ultimate goal is never having to think about money when buying something that aligns with your Rich Life vision.
• The real Rich Life advantage is psychological: knowing your money supports your values instead of working against them.

This approach transforms your relationship with money from restriction to intention. You're not depriving yourself, you're funding the life you actually want while building wealth for your future. The people who master this approach often appear to live extravagantly while secretly building more wealth than those who earn significantly more but spend without consciousness.