Living Below Your Means: A Step toward Early Retirement

This is a guest post by Lauren Bailey.

Many of us would like to think that if we could only earn more money, we’d be so much further ahead with our financial goals. While this is technically true, the money-savvy know that it’s not how much money you earn that leads to financial independence–it’s how much money you keep. Even lottery winners have been known to go broke or even end up in debt after squandering their financial windfall.

When will it ever get through our collective psyches that we don’t have to spend every dollar we bring in? If any of us are going to retire early like we hope, we must start taking significant steps to live below our means. The idea here is that the less we spend on everyday stuff, the more we will have to sock away in investments and savings and the more we will have available to pay down debt.

Establish a Budget—and Stick to It

Most of us who are at least somewhat money-conscious know more or less where our money is going every month. We often let our online checking accounts do the budgeting for us. But have we actually established a budget for discretionary spending? I’m not just talking about a token budget, where we say we will only spend $150 on dining out each month and wind up spending more like $350 on dining out each month. I’m talking about a budget that serves as a map toward your financial goals. This budget should have firmly established priorities for savings, investments and debt repayments that don’t get de-railed by impulse purchases of shoes and tech toys, as well as firmly-established boundaries on what you can spend on frills. You’ll know it’s not a token budget when your spouse asks if you want to dine out, and your response is yes or no based on whether it’s in the budget rather than whether or not your stomach is rumbling at the moment. To help us stay on task, my husband and I have arranged for sizable automatic withdrawals into our savings accounts and I have a bank draw for my investment accounts.

Run Your Car into the Ground

Do you really need a new vehicle every two to three years? Remember that the only way to really get your money’s worth out of a car is to run it into the ground—or driving it until the money it would cost to repair the vehicle is more than its current value. Maintain your vehicle well, and aim to drive your car long after you’ve stopped making payments on it. Don’t fall victim to the “three-year itch” when it comes to vehicles. It pays to do some research and invest in a vehicle known for its reliability and longevity. My husband and I both drive 2006 Hondas (he drives an Accord and I drive a Civic). Right now we benefit from excellent fuel efficiency for our commutes, and we won’t replace either vehicle unless way down the road we have to spring for a massive expense like a new engine or transmission.

Don’t Buy on a Payment Plan

Just don’t do it. Save for what you want and pay cash up front (using a debit card with the money there in the bank) or buy with a credit card that you have the ability to pay off at the end of the month (again, with the money already in the bank). This gets you out of the cycle of tacking on more debt.

Stop Competing with Your Friends

Finally, it’s tempting to buy the latest gadget that your friend just purchased. If he just purchased a gas grill, suddenly you find yourself looking for a gas grill. If he just purchased a larger flat-screen TV, suddenly your flat-screen looks a little too small. Don’t fall into the trap of feeling that you have to “keep up” with your friends. Be content with what you have and don’t replace items around your house unless you absolutely must.

In Conclusion

These are just a few practices my husband and I have put into place as we strive toward financial independence. What ways do you live below your means?

This guest post is contributed by Lauren Bailey, who writes on the topics of online colleges. She welcomes your comments at her email Id: blauren99

11 thoughts on “Living Below Your Means: A Step toward Early Retirement”

  1. We are currently saving about 60% of our income. When our mortgage is paid off in a year, we will be saving around 70%. Forget fancy investment strategies, living well below our means is our path to ER and FI.

  2. I love this post. Practical and straight forward. Being the budget guy in my relationship, I’m constantly reminding my wife why we don’t need a new car just because ours isn’t new anymore. As I read your post, I felt like I was grading myself and was happy to read the part about having our budget guide our eating out and spending money. When I first started budgeting, the budget wasn’t a guideline, it was just numbers in an excel spreadsheet somewhere. Now it drives my behaviour.

  3. “When I first started budgeting, the budget wasn’t a guideline, it was just numbers in an excel spreadsheet somewhere. Now it drives my behaviour.”

    Diddo. When I started it was just to get an idea of the past. It was then formulated to predict the future, and refined it to drive our behaviour.

    Our primary goals are saving through smart spending and mortgage reduction.

    “You’ll know it’s not a token budget when your spouse asks if you want to dine out, and your response is yes or no based on whether it’s in the budget rather than whether or not your stomach is rumbling at the moment.”

    Very true.

  4. “Living Below Your Means.”

    That’s about as easy as it gets for financial responsibility eh? Just like someone who wants to lose weight: “Diet and Exercise.”

    Just one of those D’uh moments you have, where it’s so easy you overlook it!

  5. I used to be better at budgeting when MS Money in Canada had cash forecasting – now that it is out I’ve stopped using the budgeting component of the program as much. And that being said, it’s a kind of crappy budgeting tool anyway. What does everyone use for budgeting, is there some software that I am missing or is the glass jar or envelope method the simplest and easiest? I just hate collecting receipts!

  6. Rescently, BMO came out with MoneyLogic. I LOVE IT! It tracks all of my spending automatically! It shows me how much of my budget I have used up each month in each category, it creates a pie graph of my spending, it is a great tool. I also make a cash-flow style budgets in Excel to make sure I will have the money I need when I need it. This way I save more on weeks I can and still have enough money in my account for large payments and events.

  7. Hi,
    Maybe the wrong forum but probably the right website.
    I’m sorta retired but still working at my small business
    I projected our monthly income based upon my wifes pension and mine.
    After deducting everything (estimating a bit high) we are left with a surplus of approx $1500/month. That includes about 400/month side-work wages.
    I projected everything I could think of so there may be changes but should not be drastic.
    We’re 55. Do you think thats enough to safely retire on?

  8. Mike,

    It’s hard to say with that limited amount of information. Let me make sure I’m understanding what you said.

    So your income (from pensions and business) minus all expenses (estimating a bit high) = $1500/mo surplus (of which $400/mo is the from the business).

    Provided you don’t have any expenses that you have forgotten to account for I would say you are likely good to go. As you already have over $13,000 in surplus without the business and you still haven’t started collecting CPP or OAS. I would think that should cover you. Double check your numbers and then enjoy your retirement.


  9. The $400 was assuming that between my wife and I, we pick up a few odd jobs here and there. I would possibly just walk away from my business.

  10. My sister kept getting deeper and deeper in debt, so she wanted to set up a budget. She thought she had it good because she only had a list of the main bills coming in. I had her add things like coffees, lunch with the girls each week, clothing and make-up, manicures and haircuts, etc..
    Finally I just gave a small notebook and told her to put EVERY cent she spent for one month in it. Then we were able to really see where the money went; it solved the “mystery” of why she was getting deeper in debt.

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