I’m sure you’ve heard this many times in the past. Here it is again. Here are several different ways of essentially saying the same thing:
“Live Beneath Your Means”
“Pay Yourself First”
“Spend Less Than You Make”
You get the point. As you already know, easier said…. than done!
To live beneath your means may require some work on your behalf. No apologies here. It’s just part of the deal. If you are in.
1) Know What Your Means Are
Your means are generally what your income is. The starting point for most working folks tends to be their wages. Perhaps you are self-employed and that is how you earn your income.
So, one approach is, how can I increase my income?
This might be:
• Volunteering to work some overtime.
• Expanding your self-employed income.
• Starting your side hustle / gig.
• Going back to school for more training or, perhaps, a degree.
Any, or some combination of these, might do the trick for you. You need to be very cautious here, however. Lifestyle, or spending creep may kick in. You make more money and, boom, your spending increases right along with it. You’ve got to be very cognizant of this issue. It is very real.
To get to living below your means, you’ll need to run some numbers. This is, well, the easier part. Note, I didn’t say easy. I said easier. The question you must ask yourself is:
How much does it cost you a year to live?
One of the keys here is know what your costs are for the entire year. Some bills you may pay only once or twice a year. Real Estate Taxes, Car Taxes and some insurances may be in this category. These are typically not insignificant amounts of money. You need to make sure these are included in your annual spending.
The best way to break this down is to identify your fixed expenses and your variable expenses.
Fixed expenses are items like housing, utilities, transportation, insurance, existing loan payments and necessities. Fixed expenses are, by definition, mostly fixed. So, the place to start is to target to have the lowest fixed expenses you can.
Trying to have lower fixed expenses for housing has become very difficult for many. Additionally, the housing crisis has only intensified due to the Pandemic. The rising price of housing, elevated mortgage interest rates from the recent past and a very limited inventory has made housing a challenge for many. Regrettably, there does not appear to be much relief from this trifecta of issues soon. Overtime, hopefully more supply of housing becomes available, and asking prices and interest rates decline at least somewhat.
Variable expenses can run the gamut. They typically include food, health care, entertainment, personal care, and travel.
Running the numbers is somewhat fluid. Perhaps you wrote Juniors last tuition check. It’s time to break out the champagne! Maybe your oldest just timed out and is no longer on your health insurance policy. If so, congratulations. These changes should be incorporated into your numbers.
2) Know What Your Needs and Wants Are
Your needs should be straightforward. These would include items such as housing, food, gas, and clothing. Again, as mentioned above, the lower your needs, the easier it will be to live below your means.
Your wants on the other hand, well, may get quite extensive. Where do you start with your wants?
More importantly, where do you end with your wants?
Entertainment, travel, various subscriptions are just some of your wants.
To live beneath your means, you may have to consider reducing or eliminating some of your wants. Not fun, I know. So, perhaps instead of reducing or eliminating, consider substituting.
Find something that is either much less expensive or, heaven forbid, free. Buying books online costs money. Getting books at the local library are free (technically they are ‘included’ in your taxes, but that’s another story). After you own a bike, absent the periodic flat tire that needs to be fixed, all the rides are all paid for. Cancel your Average Joe’s gym membership that you don’t use. Invest in some running shoes and a jump rope. You get the idea. Don’t make this more difficult than it needs to be. Get creative and have some fun with it.
Keep in mind, these should be your needs and wants. Not your adult children’s needs and wants. Sure, there will be times when they truly do need some assistance. That’s fine.
However, the quicker you can take down the ATM sign from the Bank of Mom and Dad, the better off you will be.
Reducing your needs and wants down while you are still working means you will need to have less assets and income in retirement. This is win-win.
3) Know What Your Long-Term Goals Are
Most folks have one primary long-term goal to retire…someday. This goal is the principal reason for you to be living beneath your means now. When you get to retirement, don’t forget the 4 Easy Steps to Stay Retired.
Retirement, of course, is way different than it was a couple of generations ago.
Your Grandparents likely had one of everything. One Job, one spouse and one house.
Also, they likely only had one car, and it wasn’t leased.
Their plan was generally very straightforward. Back in the day, many of them used the Three-Legged-Stool to retire. The three legs were:
• Company Pension Plan
• Social Security Benefit
• Personal Savings
For many, this was a reasonably comfortable retirement. Work for the man company for many years, then become eligible for the pension plan. Then, when you are eligible, start collecting your Social Security Benefit.
It’s not hard to see where this has gone. Most major employers terminated their pension plan many years ago. They decided they couldn’t afford to fund this plan for their employees anymore. While they were shutting down their pension plan, many employers also adopted a 401(k) plan.
The big difference being that the pension plan was 100% employer funded.
The 401(k) plan is primarily an employee funded plan. Many employers will offer a match to the employees in the plan. If your employer offers a match, contribute at least enough to get this employee benefit. If the employer does not match, then, regrettably, these 401(k) plans end up being 100% employee funded.
Keep in mind, the maximum employees 401(k) plan contribution for 2026 is $24,500. For folks aged 50 and older, there is a catch-up contribution of $8,000, making their potential contribution $32,500. Also, for those aged 60-63, the catch-up contribution is $11,250, making their maximum contribution $35,750. There is a reason for these catch-up contributions. Congress realizes many people are in arrears with their retirement plans and funding. Put as much into your 401(k) as you possibly can. This will likely be the cornerstone to your retirement.
Absent a small number of private employers that still offer and maintain a pension plan, they can still be found for Federal, State, Municipal Employees, Teachers, and First Responders.
So now, the first leg on the stool, the pension, is essentially out for many folks.
Let’s look at the second stool, Social Security. Regrettably, this doesn’t look very promising either. It is estimated that Social Security will be insolvent by 2033. Currently, this means it would only be able to pay out 79% of the projected benefits. 1)
There are lots of options to see that this doesn’t happen, or, at a minimum, the issue is deferred for at least the next several decades. Increasing the amount of wages subject to Social Security, increasing the tax rate, and increasing full retirement age are just a few of them. We’ll see what the new administration and the leaders of Department of Government Efficiency (DOGE) (an oxymoron if there was ever one), the currently proposed advisory committee, has for an appetite to address this critical issue.
The last leg on the stool is personal savings. This is where the rubber meets the road. With pensions out for many and Social Security, well not looking very secure, you are going to need to have personal savings to hit your goal.
As was mentioned above, the biggest building block for your retirement will likely be your 401(k) plan. With that said, don’t ignore IRA’s and Roth IRA’s. For 2026, the maximum that can be put into an IRA or Roth IRA is $7,500. For taxpayers aged 50 and older, there is a $1,100 catch-up for a total of $8,600. There are income limits for both IRA’s and Roth IRA’s. Remember, it’s important to know The Difference Between a Roth IRA and an IRA.
Said differently, this is not your Grandparents Retirement, and you are on your own.
Conclusion
If you want help with easy ways to live beneath your means, call us at (860) 645-1515 or e-mail us at Thomas.scanlon@raymondjames.com
1) Budget.house.gov/press-release/social security – May 6, 2024
This is original content written by Manchester, CT Financial Advisor Thomas Scanlon, CFP®, CPA.