Money Management

How to Live Below Your Means (Without Cutting Your Daily Latte)

How to Live Below Your Means
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In the largest-ever study of millionaires, researchers identified seven common characteristics. Among these seven traits, the study’s authors concluded that the most important (by far) was  that “millionaires live well below their means.”

In this article, we’ll cover: 

  1. Why living below your means is a key aspect of building wealth.
  2. Tips for living below your means without dramatically altering your lifestyle.

What Is Living Below Your Means?

Living below your means is learning to consistently spend less money than you make, and it’s one of the most intelligent financial strategies you can implement.

Overspending month after month (and year after year) will leave you stressed, burnt out, and feeling like there’s no path forward. 

And if you’re like most Americans it’ll leave you with a hefty chunk of debt that is hard to pay off. 

On the other hand, the sooner you start living below your means the quicker you can take advantage of the power of compound interest, one of the best wealth-building tools there is.

How to Start Living Below Your Means

Back in the 1990s, the author and financial adviser David Bach came up with a formula he called “The Latte Factor.” It was a simple equation with an irresistible hook: skipping your daily latte can make you rich. 

In one famous example — from his 1999 book Smart Women Finish Rich — Bach calculated that a 23-year-old who refrained from buying coffee every day for the rest of her life would have an extra $2 million in the bank at the age of 65. 

It should go without saying, but Bach’s formula is based on deeply flawed behavioral and economic assumptions. Nevertheless, over the next two decades, “The Latte Factor” became the go-to explanation for millennials’ financial woes, such as their unusually low levels of home ownership. And more importantly, it shaped the way an entire generation thinks about concepts like frugality and wealth. 

By now, we’ve all heard the same advice time and again: make your own coffee, buy generic brands, never eat out, cut the cord. But as we discuss in our article on money saving strategies that are backed by research, while those tips can save you a few bucks here and there — and may be worth exploring when you’re living paycheck to paycheck — they simply don’t have enough power to fundamentally alter your financial trajectory. 

So understand that living below your means isn’t about clipping coupons or denying yourself the things you love. It’s about developing habits and a mindset that will lead you to long-term financial success.

Here’s how you can start.

#1. Know Your Numbers

The math of living below your means isn’t complicated. You just need to make sure your income is higher than your expenses.

The first step is getting all of your expenses out of your head and into a system where you can track them. This could be as simple as using a budgeting spreadsheet or one of the many budgeting apps.

The end goal is to determine whether you spend less than you earn every month (without any shred of doubt). Ideally, over time you can add to this financial habit of tracking your income and expenses and also begin measuring other key personal financial ratios.

The big idea here is that you must have a system for regularly getting accurate feedback about your finances. It’s only then that you can start to make sound financial decisions.

#2. Start With Easy Habits

B.J. Fogg — a Stanford professor and the author of the book Tiny Habits — argues that one of the key ways to create a new habit is to start small, because trying to do too much at once is overwhelming and sets you up for failure.

How small should you start? 

One example that Fogg uses is trying to start the habit of flossing your teeth. Set a goal to floss just one tooth each night, he says. If you feel like you want to quit after one tooth, go ahead. 

Many people make the mistake of wanting to get their entire financial life organized in one fell swoop. So they set up some detailed, color-coded excel spreadsheet with every cent perfectly accounted for. And what inevitably happens is that one unexpected expense throws the entire budget off. 

This leads them to believe they’re just not good with money. But in reality, their expectations were far too high from the beginning. Just as important, their plan wasn’t sustainable. 

Research in health and wellness shows that “most interventions fail because they fall short of forming habits that sustain healthy behavior.”

In other words, the goal is to build good long-term financial habits. And to accomplish that, it’s best to start with what’s easy — like flossing just one tooth a night — not something that’s very difficult (like giving up your daily latte).

So what’s the financial equivalent of flossing just one tooth? 


  • Opening your preferred budgeting app daily to categorize transactions.
  • Increasing your 401(k) contribution by 1%.
  • Starting a savings strategy using a micro-investing app.

#3. Change Your Environment

Consistently spending more than you earn each month is a habit. It’s not a good habit, but it’s a habit. Recognizing this allows you to use the science of behavioral change in your favor.

What’s proven to be very effective, and which often requires the least amount of effort, is changing your environment. You wouldn’t put unhealthy food in your house if you were trying to eat better, would you? The same goes for your finances.

So it’s essential to evaluate what’s in your environment that could be tempting you to spend more than you should (or to not be making as much money as you feel you should be making).

Here are a few ideas:

  • Hide money from yourself. Prevent it from being in a checking account where you’re more likely to spend it. Potential options include opening up a different savings account just for your emergency fund, which makes transferring between your checking and savings more difficult. Another option is investing in a 401(k) where the money never even sees your checking account. 
  • Go debit card only. You don’t need to cut up all your credit cards tonight, but consider using only a debit card for the next three months. This will help you become more intentional with what you’re spending your money on, and make it less likely that you’ll whip out your card for an unnecessary purchase that will drive you into debt. Consider placing your credit cards in a place that requires extra effort to access, like a safe deposit box.
  • Fill your social calendar with frugal activities. Too often, we associate not spending money with staying in on weekends, not going out with friends and skipping happy hours. The truth is that there are plenty of frugal things you can do with friends that don’t cost a lot of money. The problem is that not everyone wants to plan them. So become the default planner among your social group or family, and schedule free and fun activities ahead of time.

#4. Hold Yourself Accountable to Others

A study by Gail Matthews of Dominican University in California found that you’re 76% more likely to accomplish a goal if you share progress reports with someone else.

Many people’s default behavior is to keep their money goals to themselves. Unfortunately, this is true even with couples, where a lack of communication about money can quickly lead to conflict and resentment.

But this isn’t just true for couples. If you’re working towards living below your means, it’s important to surround yourself with people who not only support you and understand what you’re going through, but who can also hold you accountable.

In the best-selling book Atomic Habits, author James Clear writes:

“As a general rule, the closer we are to someone, the more likely we are to imitate some of their habits. One groundbreaking study tracked twelve thousand people for thirty-two years and found that “a person’s chances of becoming obese increased by 57 percent if he or she had a friend who became obese.” It works the other way, too. Another study found that if one person in a relationship lost weight, the other partner would also slim down about one third of the time. Our friends and family provide a sort of invisible peer pressure that pulls us in their direction.”

To get the best of both worlds, find someone with good financial habits to share your progress with. Sometimes, a simple text message checking in on your goal is all it takes to stay the course.

If you don’t have anyone in your life who meets this criteria, consider joining an online community where the idea of living below your means is the norm.

For example, in some peer groups, taking out a $60,000 loan to buy a truck while you’re paying off credit card debt would be seen as reasonable. But in the FIRE community (Financial Independence, Retire Early), that decision would be viewed as crazy and unacceptable.

In other words, who you choose to surround yourself with can influence how you think about your finances.

The takeaway is that we all need someone to help us stay accountable to our financial goals, whether a friend, family member or an online community. 

#5. Start Paying Your Goals First

Setting up an automatic bill payment for your mortgage, using the auto-payment feature for your credit card, or contributing to your 401(k) are all excellent examples of automating good financial choices.

No question, these are some of the first things you should automate. But you shouldn’t stop there. This approach to paying your goals first should become your default way of managing your money.

Reverse Budgeting Graphic

When leveraging this strategy, everything important to you — whether setting aside money for long-term travel or getting out of debt — gets prioritized.

And when what should be prioritized gets paid first, it becomes infinitely easier to cut ruthlessly everywhere else.

Behind the scenes, this teaches you to manage your money according to your life’s purpose and values. It makes money management seem like a chore and more like a tool that can help you live a more meaningful life. Long-term, that’s the surest path towards sound financial management.

Living Below Your Means FAQ

Why is living below your means important?

Compound interest is either working for you or against you. When you’re constantly spending more than you earn, you’re slowly but surely accruing debt. This creates a hole that becomes increasingly difficult to climb out of. On the other hand, when you live below your means, you free up room to take advantage of compound interest, allowing your money to work for you.

How can you change your mindset towards living below your means?

Get clear about your long-term financial goals. Then, act in a way that’s consistent with your long-term goals. For example, if your long-term goal is to save 20% of your income, consider increasing your savings rate by 1% every three months.

How can you live below your means without feeling deprived?

Money management is all about opportunity costs. Ray Dalio said it best when he wrote, “Life is like a giant smorgasbord with more delicious alternatives than you can ever hope to taste. Choosing a goal often means rejecting some things you want in order to get other things that you want or need even more.”

In other words, there’s nothing wrong with wanting a nice car, a big house, or to travel the world, but if that’s what you want, you have to decide what you’re willing to give up to get it. And if you’re not ready to give things up, then it’s not a priority for you.

The Real Benefit of Living Below Your Means

In the bestselling book Drive, Daniel Pink writes that to be entirely motivated in life — and to be truly fulfilled — one needs a certain sense of autonomy, followed by mastery and purpose.

Living below your means checks all three of those boxes. It provides latitude to decide what you want to do with your life. After all, for anyone living paycheck to paycheck, it’s hard to think ahead more than a few days at a time, let alone months and years ahead.

In many ways, financial freedom is a lot like a continuum. The goal over time is to move to a life of greater and greater freedom. This allows you to choose how you spend your time, who you spend it with, and what kind of work you do.

The further along the continuum you are, the more choices and flexibility you have in your life. You get there by making small but intentional steps in the right direction each day. 

R.J. Weiss
R.J. Weiss, founder of The Ways To Wealth, has been a CERTIFIED FINANCIAL PLANNER™ since 2010. Holding a B.A. in finance and having completed the CFP® certification curriculum at The American College, R.J. combines formal education with a deep commitment to providing unbiased financial insights. Recognized as a trusted authority in the financial realm, his expertise is highlighted in major publications like Business Insider, New York Times, and Forbes.

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