Living below your means is the best way to achieve financial freedom and live a happy life.
Many successful investors attribute their wealth to living below their means. Some investors pursue this lifestyle very early and continue to live below their means for the rest of their lives.
Other investors live below their means for a long time and then splurge a little once they have built up enough wealth.
If you want to live below your means and do it well, it’s better to act as if you’ll live below your means for your entire life. You can do the occasional and slight lifestyle upgrade, but you don’t want to fall into the trap of always upgrading your lifestyle when you make more money.
For example, just because you get a raise doesn’t mean you should spend more money each month. Living below your means requires financial discipline and a vital understanding of what’s important to you versus what society wants you to think is important.
Let’s jump into 5 of the best ways you can live below your means and start building your wealth.
#1: Buy A Used Car
The two biggest expenses for most people are the car and home, so we’ll tackle those expenses first.
Many people make the mistake of buying a new car and then buying another new car to replace the old car within 5–7 years.
A new 2020 Toyota Highlander currently has a starting price of $34,600, and prices can get much higher if you include additional features. On the other hand, I found a 2006 Toyota Highlander on eBay selling for $6,000.
While this car currently has 170,000 miles on it already, it can last quite more than that. Some Highlanders have racked over 300,000 miles which gives you at least 130,000 miles to play with.
Due diligence is essential when buying a used car. You don’t want to choose a model that is fundamentally flawed or will need frequent repairs. If the car is good but it just has some miles on it, this strategy will save you a ton of money.
You also have to consider how often you drive your car. For most people, it takes several years to go 100,000 miles in the same car.
I know people who have bought used cars for under $3,000 that still work years later. That $3,000 payment for an old car is less than the yearly payment of a new car…especially if that new car is a BMW.
A used car won’t get you style points, but living below your means isn’t a style points competition.
#2: Buy Less House
Just because you can afford a $300,000 home doesn’t mean you have to get a $300,000 home. Buying a smaller house means a more affordable down payment and lower monthly mortgage payments.
Getting lower mortgage payments is vital on the path to wealth because mortgages are a big expense that won’t go away for 15–30 years.
I personally recommend the 30 year mortgage because you get more money in your pocket now which you can deploy to build your wealth.
While mortgage payments are a top expense for most people, remember that their interest rates are small. An interest rate under 4% means you only have to produce a 4% annual return in the stock market to break even.
A 4% annual return from the stock market is extremely conservative and that return can even be done with some bonds.
It makes more sense to invest the extra money into an asset to build wealth rather than opt for a 15 year mortgage which has more expensive monthly mortgage payments.
It’s no wonder the wealthiest people like Mark Zuckerberg still have 30 year mortgages for their properties. I talked more about the 30 year mortgage in an article explaining why you should never pay for your house in full.
#3: House Hack
If you want to achieve financial freedom, you have to make your money work for you. This is the most important rule for building up wealth and solidifying a successful financial future.
However, you can also make your house work for you.
If you have the financial means and the patience, you can buy a multifamily property and have tenants pay the rent for their units. Some people buy duplexes and triplexes rather than a single family home so the rent paying tenants pay down the mortgage.
You don’t have to build a real estate empire, and you don’t have to stay in the multifamily property forever. You can buy a single family home when you’re more financially comfortable with doing so while having a multifamily property generating cash flow.
You can also decide at some point to sell the multifamily home after the tenants have paid off your mortgage and use those funds to buy a single family home. If you get sick and tired of dealing with tenants, this is a good exit strategy.
If you already have a single family home and don’t want to commit to tenants, Airbnb can be a great side hustle.
Airbnb hosts make $924/mo on average according to CNBC. That can make a big difference for your mortgage payments.
And you don’t have to rent out the entire property. You can continue living in your home and offer one of the bedrooms for rent. Most Airbnb customers are respectful and won’t present nightmare scenarios you may have heard about elsewhere.
If you don’t enjoy a tenant, that person will be gone in a few days rather than a few years, and you don’t have to work on Airbnb every day.
Some Airbnb hosts only make their homes available 1 week every month or just on the weekends. Timing your availability around big events in your area can help you earn a premium. Many Airbnb hosts in college towns make full-time incomes just by catering to college students from out of town who came to root on their favorite football team over the weekend.
It is possible to make 6-figures from Airbnb, and while it can feel like a job similar to being a landlord, it is far easier to back out of an Airbnb set-up than it is to step out of being a landlord.
#4: Automatic Investing
Brokerages give you the ability to automatically invest a set amount of money each month. You can invest additional money each month if you want, but automatic investing ensures a set amount of money will go from your bank account to your investing account each month.
Automatic investing allows you to passively build up your wealth, and more importantly, not see the money.
Most people spend their money because they see a big lump of it sitting in their bank account and collecting dust. Automatic investing takes that extra money out of sight and out of mind.
Imagine making $5,000 every month and then $1,000 of that automatically goes into your brokerage account each month. Living a $4,000/mo lifestyle on a $5,000/mo salary is one of the best ways to build up your wealth.
The more money you invest each month, the quicker your wealth can grow.
#5: Put On Your DIY Cap
We often pay people to perform routine activities because we don’t feel like doing them ourselves or learning how to do them.
Making our food, cutting our hair, mowing the lawn.
These are all tasks we can learn to do ourselves and save money. While these expenses may seem small, they do add up. Cutting your own hair will save you $1,000s over the course of a lifetime as will making your own food and mowing the lawn.
Before you give someone your hard earned money, ask if you can do it yourself. If you can do it yourself and save time, keep your money.
Making your food takes the same amount of time as waiting for your food to be made. Sure, a fast food has the food already made, but you’ll have to commute back and forth. Even if you order a food delivery to your place, the time you spend waiting is time you could cook your own meal.
You can start cooking something, set a timer, and do other stuff until you hear the timer going off.
I’ll hand off some of my work to virtual assistants or buy certain software because those investments allow me to save time. I then use this extra time to get additional clients and build up my income streams.
I’ll still buy fruit at the store because I’m not starting my own farm, but I frequently pay attention to what I pay for and wonder if I can do it myself instead of paying someone else.
Living below your means is one of the best ways to live. You reduce the amount of financial stress and get to value the important things in life rather than the superficial stuff such as luxury cars and big houses.