it means to be so poor that you can only afford food and perhaps some other basics, but nothing else
Perhaps even more literally - you are living so close to the edge that you consume everything you can get your hands on - there's nothing in the pantry, nothing to set aside - as soon as you get it, you use (eat) it.
That's a good explanation. I just knew the German form of this phrase and did not understand it. "Er lebt von der Hand im Mund" means "He lives by the hand in the mouth." Now I know the phrase is wrongly used here. It should be "Er lebt von der Hand in den Mund" = Hand to mouth, not IN the mouth. Great, thank you!
Yes, it's a well-known phrase, but thankfully not a reality for most people.