Why Living Below Your Means is a Poor Way to Live

Rethinking the conventional financial wisdom that money troubles must be a result of overspending.

Self-help personal finance experts from Suze Orman to Dave Ramsey often share the same conventional wisdom with consumers: If you are experiencing money problems, then you must be living beyond your means. The solution is to reduce your spending, no matter how hard or difficult it might be.

I must admit that I have found myself guilty of this same kind of thinking. Especially in my earlier personal finance articles that tended to lean heavily on cutting spending. I still believe that overspending is a problem for many. Oftentimes, there seems to be much larger issues that cause consumers to struggle financially.

For instance, a recent survey from PayrollOrg found that the number of Americans reportedly living paycheck to paycheck this year is nearly 80%. High food prices, healthcare expenses, and housing costs are three big culprits. Those necessities hardly sound like lavish spending to me.

And the fact that many consumers still have limited financial literacy is probably another factor.

Therefore, the purpose of this article is to pull back the veil on some often misguided personal finance advice by exploring ways to do the opposite of living below your means — like raising your means by increasing your income, long-term wealth, and financial literacy.

What does living below your means actually mean?

When personal finance experts tell people to live below their means, what they mean is for you to spend less than you earn. On the surface, that’s pretty sound advice.

For example, if you earn $48,000 a year, but spend like you make $60,000 annually, then you’re living beyond your means — and will soon find yourself in serious financial troubles.

Money experts would tell you to reduce your spending by at least 20% ($12,000) in order to live off your $48,000 annual salary. Actually, they would likely tell you to live off less than $48,000, so that you can save money, pay off debt, and reach other important financial goals.

In that case, you might have to say, live on $36,000 a year, and put the remaining $12,000 towards paying off debt and savings. That can be tough!

The Benefits of Living Below Your Means

And there are many long-term financial benefits of having disposable income to save and invest.

1. Saving up for a down-payment on a home
2. Saving for retirement
3. Building long-term wealth
4. Reducing financial stress

Dave Ramsey often says that if you don’t control your finances, then they will control you.

Therefore, ‘living below your means’ — especially staying out of debt and having money in the bank — can help you enjoy greater financial freedom, because you are ultimately the one who controls your finances.

What’s Wrong With Telling People to Live Below Their Means?

Since every person (and their respective financial circumstance) is different, giving one-size-fits-all personal finance advice just doesn’t make sense. What might be true for me isn’t necessarily true for you. So, should either of us be chastised when our individual financial journeys are different?

Ignoring Income Growth Potential

No one says that your income today has to be your income in a year, month, or even a week from now. For example, there are several ways to boost your income:

1. Asking your boss for a raise.
2. Finding a better-paying job.
3. Starting a side hustle or business.

Stifling Opportunities for Personal and Professional Development

Also, when we tell people to live below their means, we are kind of setting a bar for them to live under, instead of reaching or exceeding it. In effect, we have created a ceiling for them that caps their potential — potential for a higher living standard.

We aren’t motivating them to do better. We are just saying, stay in your place — or worse yet, stay below your place.

What we should instead be doing is inspiring people to pursue greatness. Set the bar higher. Break through those glass ceilings. Go after those personal and professional goals that you might have been too afraid to tackle.

And above all, do whatever it takes to raise your living standard to satisfy the way you wish to live.

Overlooking the Issue of Deprivation

For some people, ‘living below their means’ may mean going without important necessities, including adequate food, medical care, and insurance coverage.

I have often heard of low-income seniors having to choose between buying fewer groceries or forgoing their prescription drugs. I have also known people who put off expensive medical treatments they didn’t think they could afford.

That’s why we shouldn’t always assume that when people “overspend,” they are just being careless with their money. Maybe they are having to “overspend” due to important necessities to help them just survive.

The Importance of Income Generation

I touched on this earlier, but I think my fellow finance gurus would better serve our respective audiences by shifting the focus from spending less to earning more as a way improve personal finances.

Investing in Education and Skills

Acquiring more valuable skills can often enable you to earn more money.

For example, lets say you have experience working as a bookkeeper — and you currently make $20 an hour. In order to boost your earnings potential, you decide to get an accounting degree. After attaining your degree, you land a better-paying accounting position that pays $40 an your.

You have just doubled your earnings potential by getting more education.

Maximizing Earnings Potential as a Component of Financial Success

Ultimately, figuring out how to earn more money is going to be a central component of your financial success, whether it’s from pursuing career growth or business opportunities.

Acquiring more knowledge and skills will almost always enable you to make more money — enabling you to enjoy a higher standard of living.

Building Long-Term Wealth Through Investing

Building long-term wealth from investing is another important way to increase your means.

My college investments professor used to share some wise investing advice with my class: “Be a long-term, well-diversified investor who doesn’t take a whole lot of risks.”

His advice was simple: You can potentially make a lot of money by being a prudent investor.

Taking a Long-Term Approach to Investing

Being a long-term investor means that you don’t let short-term market moves dictate your investing strategy. In other words, you don’t decide when to buy or sell based on your emotions, but rather a sound, long-term investing strategy.

For example, my college income tax professor used to tell our class about one of his former tax clients making a poor financial decision following the Crash of 87.

The Dow Jones Industrial lost more than 22% of its value in a single day. His client decided to liquidate her investment portfolio of blue chip stocks. She took about an $80,000 loss.

However, it only took the stock market around a year to recover its losses. So, if this lady would have simply left her investments alone, she would have more than made up for the paper losses and ended up with substantially more long-term wealth.

Being a Well-Diversified Investor

My college investments professor used to tell my class that one of the easiest ways to be a diversified investor is to simply invest in mutual funds, as opposed to individual stocks.

For example, if you invest in the S&P 500, you immediately own a piece of the 500 largest publicly traded companies in the United States — representing 80% of the country’s total market capitalization. Furthermore, these companies come from a wide range of industries.

For example:

1. Financials
2. Utilities
3. Industrial
4. Consumer Staples
5. Technology
6. Energy
7. Healthcare

You don’t have to worry about being over-exposed to a single stock, or even industry. And this advice could work for diversifying your risk in other investments, including real estate and bonds.

Finding the Right Risk-Reward Balance

The same professor also used to say that every investor should invest their money according to their personal risk tolerance (i.e. how much risk they are willing to stomach from the ups and downs of the stock market.)

For example, if your goal is to maximize your returns while investing as easily as possible, then an S&P 500 index fund might be the way to go. However, if you are a bit more risk-averse, then a balanced fund (i.e. a 60/40 split between stocks and bonds) might be a better fit for you.

Promoting Greater Financial Literacy

Managing money is hard enough. But having limited financial literacy can make the job of managing your finances all that much tougher. So, it’s really no wonder that nearly 4-out-of-5 Americans is reportedly living paycheck to paycheck.

However, promoting greater financial literacy can help millions of struggling Americans raise their living standards through more thoughtful financial decision-making and savvy spending.

The Role of Financial Education in Making More Informed Money Decisions

The more good money sense you have, the less likely you are to make boneheaded money decisions. And good money sense usually comes from acquiring good knowledge about how to handle finances.

That’s why many colleges and even a growing number of high schools are adding a Personal Finance 101 course to their required curriculum. However, even if you aren’t in school, there are still several ways you can increase your financial literacy that can be found on the internet.

In addition to online courses on money management, you can also find informative eBooks on personal finance.

Creating a Sustainable Budget

My older cousin often says that “every household is like a small business. And in order to be a thriving ‘business,’ they need to create and follow a budget to stay in the black.

Therefore, creating a sustainable budget can help people enjoy a higher living standard — instead of just being unintentional with their spending.

Tailoring Budget Strategies for Individual Circumstances

In recent years, I have become a big fan of the 50/30/20 Budget as a way to manage money in order to meet necessities, splurge a bit, and build long-term wealth.

Here is how the 50/30/20 Budget works:

1. 50% of net pay is spent on needs
2. 30% of net pay is spent on wants
3. 20% of net pay is put towards savings

However, I am going to add a caveat: Every individual should be able to tailor their own budget based on their own individual circumstances.

In my case, I tend to spend a little less on wants, and then apply the surplus money towards saving and investing.

Incorporating Flexibility for Unforeseen Events

Anyone can be forced to change even the best-laid plans. And that can include your budget.

Therefore, instead of using rigid figures in your budget, allow for a bit of flexibility to account for month-by-month changes that might occur in your personal finances.

For instance, one month you might be forced to spend a little more on needs and a little less on wants. While another month, you might have a bigger surplus in which you can splurge a bit more with. So, be flexible.

Defining Financial Freedom Beyond Living Below Your Means

Many personal finance experts define financial freedom by the following attributes:

1. No debt
2. Plenty of money in the bank
3. Fully invested for the future

Oftentimes, they say that the way to achieve these things is by living below your means. For instance, spending less money than you earn means you can have the resources necessary to pay off or altogether avoid debt, save money, and invest to build long-term wealth.

And that is absolutely correct for some people. However, living below your means implies that you need to stay in your place.

What I have laid out in this article is that you can raise your living standard by raising your means.

For example:

1. Maximizing your earnings potential from career growth, acquiring more skills and education, and pursuing entrepreneurial opportunities.
2. Building long-term wealth from investing wisely.
3. Improving your financial literacy to make more sound money decisions.
4. Creating a sustainable budget that includes enough flexibility to meet your unique circumstances.

So, the next time you read or hear someone mention living below your means, just shake your head and think to yourself: That’s a poor way to live.

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