The two sides of “live within your means”

Often when people hear, “Live within your means,” they think of cutting back, scrimping, and reducing their lifestyle. That can often be the answer in the near term to get you on the right financial path, however it has is own dangers in having this as your dominant financial thought.

I see the phrase as having two parts. The first part is to spend less than you make. If you are spending more than, or even everything, you make you will never get ahead financially and need to make whatever adjustments to live well below what you make. You must have free cash flow that you can invest, first in yourself and then second into a business or the market, and the more free cash flow you have, the faster it can grow.

In the book The Richest Man in Babylon, the author describes this concept as viewing money as a worker who goes out and brings you back more money. As I started working on my financial thinking, I began to see that every dollar I spent was a dollar that would not be working for me to bring back more dollars.

The danger of focusing just on spending less than you make is that you start thinking like a miser. It starts to create thought patterns and habits that limit your potential. That’s why it is so important to know why you are improving your finances. What’s the end goal? Or as Stephen Covey put it in his book 7 Habits of Highly Effective People, “begin with the end in mind.”

So to support this growth mindset, this thinking pattern that sees growth and a bigger future, I would add a second, critical part to the phrase, “live within your means,” and that would be, “make more than you spend.”

You may be saying to yourself that making more than you spend is the same is spending less than you make, and you’d be right. The difference is on the emphasis. When you emphasize spending less than you make, it tends to lead to a limiting life, a dead end of doing no better than you are right now. But when you make more than you spend, it opens up a bright future of possibilities. 

That’s not to say that just making more than you spend of the answer. You need both, making more than you spend and spending less than you make. Yin and Yang. Breathing in and breathing out. One without the other will also leave you unbalanced.

I’ve seen people who live by the mantra "make more than you spend." They say things like, “I’ll just make so much money that I don’t have to even think about what I spend.” There may come a point in your life where that is the case, but along the way you’re going to have developed some frugal habits and thought patterns to even get to that point.

Ignoring spending less than you make and just focusing on making more leads to a never ending pursuit of money. You may make more but you’ll also end up spending more. I remember being just out of college and seeing how big that paycheck looked from my first professional job. I also remember how small it looked just a few short years later, after a few raises, when it felt like I was no better off even though I was making significantly more money. I never seemed to be able to have the free cash flow to turn into little workers that would bring me back more money.