You feel like you hear or read this everywhere, but what does it really mean to “live below your means”? It means that you live on less than you make, sounds simple right? For most though, it’s a difficult concept.

The first step to living below your means is to create a budget or spending plan. You have to know how much outflow you have compared to your inflow, income. If you spend all your money on monthly bills and necessities, you are not living below your means. Just because you don’t over draft your bank account doesn’t mean you get to skip this part.

Ideally, living below your means includes saving 25-50% of your income. What are you saving for? You tell me. Retirement should be at the top of your list, you don’t want to be working forever! You should probably be saving for your next car, no matter what condition yours is in now. You can determine how much you want to save for that before moving on to something else. Do you want to buy a house? Then you definitely need to be saving for a down payment there. You should shoot for 10-20% for a down payment. At 20% down, you can get rid of that pesky PMI, which will save you thousands over the years, not to mention all the interest you won’t have to pay on that.

You can choose to save for whatever you want, but make sure you are actually saving and not transferring money into your savings account to just transfer it back out next month. You need a buffer between your income and your outgo in order to save. You shouldn’t be struggling to make it by while trying to save. If you have debt, that will get in the way of your savings. Pay off your debt and scale back your lifestyle enough to save! You don’t need to go to lunch everyday because it’s not convenient to pack a lunch for work. You don’t need to go out every Friday and Saturday night for drinks with your friends. I’m not saying you can’t have fun, but you don’t need to be blowing all your money on things that won’t create return on investment.

For each person, living on less than you make is going to be different. If you have a 401K offered by your employer, then you won’t have to save as much out of each paycheck’s take home pay. For some, all you do is save, which is nice, but you should also spend a little money on nice things that you need.

Use this equation to determine how much you should be saving out of each check:

Paycheck – 25% = lifestyle

You need to include all your bills and necessities in your lifestyle cost. If you don’t have enough after saving 25% to cover that, then you need to make some decisions. Either you need to scale back your lifestyle or you need to generate more income.

If you still have more money left over after necessities and bills in your lifestyle category, then you can increase how much you save.

Make it a game, start small and try to out-save yourself! Pretty soon you’ll have a nice little pile of money!