When Mrs. 1500 posed the question yesterday about living below your means (I’m going to refer to it as LBYM from now on), I admit that I hadn’t thought much about it either. I pondered the question for a bit and came up with two criteria you must meet if you want to define yourself this way:
- No debt
- Living on less than you earn
I admit that my view is very binary, but I don’t think that you can consider yourself to be LBYM if you have debt. On top of that, you must be bringing in more than you spend.
What about me?
I’ve always thought about myself as someone who LBYM, even though I don’t meet my own definition. In the present day, we spend about $3,000/month and save about $6,000. Hell yeah, life is good!
However, I have a mortgage to the tune of about $120,000. I chose to leverage debt because of historically low mortgage rates (15 year fixed at 3.25%). Because I have the money to pay off the mortgage, I would still consider myself to be LBYM. It’s nice when you get to make up the rules, isn’t it?
My wayward neighbor
This brings me back to my neighbor who thinks that she is LBYM. Her family has a loan on at least one car. They have also taken out second mortgages to fund pricey remodeling projects. This isn’t LBYM at all.
Just because you have a surplus of money every month after you pay all of your creditors doesn’t mean that you’re living a healthy financial life. It’s actually the opposite. When you borrow money to get by, it means that you spend so much that you have to defer your debt to future years. LBYM, no way.
Any thoughts?
Am I being too harsh? Do you think mortgage debt should be given a pass too? Maybe it should.
Perhaps a better way to think about LBYM is to compare your debt pile to your nest egg*. If your nest egg is growing faster than your debt bomb, perhaps you are living below your means. I think that I like that.
Readers, what do you think? I must admit that this seemingly simple question does not have such a simple answer.
*I don’t like the idea of including a home in this new LBYM calculation. That would present a loophole where folks in rapidly appreciating areas (Hello San Francisco!) could justify debt as long as their home value increases outpaced it.
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MyMoneyDesign says
Anyone who wants any amount of financial success in their lives should try to LBYM as a measure of good practice. Whenever your expenses out-weigh your income, you’ve got a problem. But I wouldn’t be too quick to write-off loans. With interest rates so low, that can be a unique opportunity to leverage arbitrage to your advantage. We have a mortgage at 3.75%, car loan at 1.75%, and our appliances are at 0%. I could pay off all of these today with our savings, but I’m earning ~10% in capital appreciation from my investments. So its better long term to keep the money in my investments.
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1500 says
Another vote for the leveraging debt camp!
Regarding the appliances though, I’ve gotten some great ones off Craigslist for next to nothing. It amazes me what people will sell for $50 just because it doesn’t quite match their remodeled kitchen.
Retired To Win Alex says
MyMoneyDesign’s comment leads me to propose the idea of combining Living Below Your Cash Flow (LBYCF?) with Savings Exceeding Debt (SED??) into a revised definition of Living Below Your Means. Under this definition, to be living below your means your income must exceed your outgo AND you should be able to pay off your debt entirely with your savings if push came to shove.
How’s that?
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1500 says
I dig it! I tend to be hard on myself and your version is a little less hardcore.
Danny MoreBucks says
That’s too much leverage for me when you start talking about cars and appliances. I get the concept, but leveraging a few thousand bucks (hopefully you’re not buying new cars) to throw into the market with a short loan payoff period only works out in a bull market, and nobody can time the market. Those should be cash purchases.
Living below your means is to be living frugally. I’m of the opinion that LBYM is vague enough that you can’t put a number or a percentage to it, but you can feel it. If you’re riding along in someone’s newly financed car or boat, or visiting their cabin and they bring up the topic of living below their means, you’ll know it’s an empty statement.
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1500 says
Buying new cars, yep, I’ve made that mistake. But hey, it was 0% interest. I would never do it again. Oh well…
EurFI says
Your mortgage debt is so small compared to your net worth – of course you get a “pass”.
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1500 says
Thanks EurFI, glad you saw it my way! 🙂
Debbie M says
I’m thinking you might prefer a positive net worth rule over a debt of zero rule. You do still have the possible problem of wacky house values obliterating irresponsible debt, but then they really could sell off a house to remove their debts.
Or you could ignore mortgage debt and treat mortgage + maintenance + taxes + insurance as rent. However, then you have the problem of people refinancing all the time to reduce their payments by resetting the clock and/or pulling cash out.
Maybe increasing non-house net worth + increasing mortgage payoff (= increasing net worth if you pretend the house is the same value as when you bought it).
1500 says
Yeah, I think I’m probably putting to much emphasis on the debt. I really do dislike it, but not enough to pay it off or even pay anything extra. I may reconsider that if our purchase of the rental property moves ahead.
Debtless in Texas says
It honestly depends. Some people buy more house than they can afford and struggle to make payments/PMI – this is not LBYM and they are one emergency away from losing the house. As such, this should not be given a pass. Also, much like CA found out there are often housing bubbles that can ruin you financially if you are underwater on the loan. While I don’t see mortgage debt as terrible debt (like credit cards), to me it is still debt – and I hate being in debt.
So yeah, I agree with your assessment – no debt and living on less than you earn. That is also pretty close to the definition of FI too though!
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1500 says
Yeah, any kind of debt sucks and I’d be lying if I told you that I hadn’t been tempted to toss an extra couple of dollars at the mortgage. So far, I’ve resisted.
Mrs SSC says
I think to an extent mortgage debt should be given a pass, if the house you have as mortgage on is much less expensive then what you could have gotten a loan approved for.
I agree, it doesn’t seem like your neighbors are LBYM. The more I think about it – I think a proper definition needs to include a moderate monthly savings rate.
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1500 says
“I think a proper definition needs to include a moderate monthly savings rate.”
I think so too. Especially if you’re young and making good money. Save until it hurts.
Allie says
I think it depends on the type of debt – like you mentioned, a home is (hopefully!) an appreciating asset, and usually large enough that you have to have a mortgage. And while I hated my student loans and wanted to destroy them as soon as possible, I don’t necessarily think that having student loans prohibits you from LBYM – because in the ideal scenario, you need that education in order to maximize your earning power and sometimes it’s hard to do that without debt.
Credit card debt though, I don’t see a way around. There’s no way to LBYM if you carry a credit card balance.
1500 says
Yeah, student loans are an investment in yourself. Hopefully, you’re taking out loans to study something that will get you a good paying job and in the long run, be much better off.
Sue says
I would put more of the emphasis on ‘living’ – to me, living below your means also suggests living frugally and thoughtfully when making spending decisions. For instance, keeping your old phone because it works just fine, not lining up to acquire the latest iphone, even though you could afford it. Same for cars, appliances, TV’s, etc. – all the shiny consumer items we’re encouraged to buy. I think I could summarize by saying that living below your means implies spending on ‘needs’ rather than ‘wants’.
1500 says
“…living below your means also suggests living frugally and thoughtfully when making spending decisions.”
I like this a lot and this is something that I think about often. I see my young relatives go out and buy new cars as soon as they get their first real job. Why, I say? Your old Civic still worked fine. Forget the car. Forget the phone.
Thegoblinchief says
Make it about savings rate, maybe? I think you’d have to consistently be above a 25% savings rate to truly be LBYM. Otherwise you’re just in a temporary surplus/reprieve from the next emergency.
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1500 says
Yep, especially if you’re young…
Finance things in Life says
I want to defend debt a little bit here. I think that some of us have the ability to see debt as a tool, a financial tool. It’s a great way of leveraging your assets and increase your worth faster than just saving what you earn. You can use this tool to increase your growth. Admitettly, it will hurt you when used in the wrong way, but name me one company that does not use debt in the balance sheet? If you can look at yourself as a company and create your own balance sheet, then I think you can find a way to use this tool.
Of course the credit debt is horrible and more times then often a bad idea. It should only be used in emergency, but that’s the crappiest tool in this tool box. I guess the only thing I want you to take away from this is a sober look on debt and not “fear” it (Blasphemy!!! I know).
OnlyKetchup says
Agreed. I think making a conscious choice to use low interest debt so that one can deploy their assets elsewhere can make sense. From what I’ve read, if your interest is less than inflation, you essentially are getting an interest free loan. For LBYM, I think that would revolve around savings rate, no credit debt, making choices to spend much less than you’re capable.
1500 says
Yeah, maybe my definition is a bit too harsh. I agree that debt can be a powerful tool, especially now when borrowing money is so cheap. It should only be used though after careful consideration.
Mr. FSF says
Considering that you have to practice what you preach, we consider leveraging debt also acceptable within the LBYM.
We almost brought our mortgage back to the original value and used the available equity to purchase a duplex. Since the interest on the mortgage is 2.5%, it was easy to get a good return on the investment. Plus, we now own three properties on one manageable mortgage. On that note, we still manage to have a savings rate of about 50%, so I guess we are LBYM.
Great topic, interesting to read the various responses, lots of ideas out there.
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1500 says
I’m glad other smart folks are leveraging too. I love the idea if done carefully. Money is just too cheap to ignore.
2.5% is a killer rate!
Brian @ Debt Discipline says
A home and mortgage is typically consider a good debt, because it’s an assets that will appreciate. When sold you can cover any outstanding mortgage and make a profit. As long at you fit that criteria and have no other outstanding debts I would consider you LBYM.
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thegoblinchief says
There is no such thing as a house that “will” appreciate. It may appreciate, but it may not.
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1500 says
I agree with both of you on this one. TGC is correct, one need not look farther back than 2008 to see the last major home price crash. Some areas still haven’t recovered.
However, I like to buy dumps and fix them up with my own hands. I like to call it ‘forced equity.’ It is not a sure thing, but it helps my odds.
Fervent Finance says
Your debt 100% gets a pass. Once you factor in the tax deduction, that interest rate falls below 3%. While I don’t personally look at personal residences as an “investment”, you still have the ability to pay off the debt with only about 10% of your net worth. And on top of that you’re saying about 2/3 of your income! Also, I believe that us in this personal finance community will have a more strict definition of LBYM, than Joe from down the street.
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1500 says
I don’t have enough deductions to even itemize anymore, so my mortgage debt doesn’t get any better than 3.25%. That is still incredibly low though and I don’t lose sleep over it. My mortgage has 13 years left to go and I’d bet that I’ll be making more than 3.25% from my savings account long before my mortgage is paid off.
Fervent Finance says
Ahhh yes, you file married filing jointly so your standard deduction is much higher. As a single filer living in NYC, I itemize alone based off of NY state and NYC taxes I pay 🙁 Why do I live here again?
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1500 says
I have a good problem! This is the first year in a long time where we haven’t been able to itemize and I love it. The mortgage deduction is overrated IMO.
Never been to NYC, but it looks like fun, even if it isn’t cheap…
Beth says
We recently remodeled our rental house and while I don’t carry debt on credit cards (that is pure insanity!!)…I did take advantage of a zero percent interest rate on certain consumables used in our remodel. I felt that I could better leverage my money by earning interest/investing it. Does this count as debt, yes, but is it using debt to my advantage…I say yes. Does this mean I’m not living below my means, I hope not. I do have a mortgage though, so I don’t qualify for the first definition, but I’m set to pay this 15 year mortgage off 9 years early…so I’m doing my best to blast out that debt too.
1500 says
We use the 0% Home Depot offers too! 🙂
I think leveraging debt can be a smart strategy for those savvy enough to properly execute it and it sounds like you are. Plus, you are remodeling a rental which will bring you in more money.
So, you’re doing all of the right things, so my definition needs an asterisk!
Kathy says
If you are making your mortgage payment along with other living expenses and each month you still have money left over, you are living within your means. I would say the same about using credit cards IF you pay them off every month. The only time I would carry a balance is if the interest is 0% and I can get more yield from an investment than that. Then the balance should be paid before the rate goes up. However, I really don’t like doing that either.
1500 says
Yep, I agree that 0% debt is OK for those of us smart enough to properly leverage it. I still owe Home Depot a small amount of money from one of those offers…
tarheeldan says
LBYM: Positive and growing net worth
1500 says
Short and sweet, love it.
CharlesMakesCents says
I think debt is largely irrelevant to whether one is LBYM–instead, its USE defines whether one is or is not LBYM.
Car loans in our area are about 1% right now for a 3 year loan. Using nearly 100% safe treasuries I can earn 3.5% on my money. If I absolutely HAD to buy a car (which I don’t, because I’m LBYM), I’d be buying one with as much credit as I possibly could. Most of us can see why this would be the highest-yielding choice in the long run.
If, however, one begins accruing consumer debt to fund a lifestyle they can’t afford today, they may indeed by LBYM, and a car loan could well be a symptom of that.
I like to think of LBYM another way:
Am I living the same way as someone who is one tax bracket/income tier below me? We make about $70k a year, yet we live like folks who make $40k. A lot of people at my office, who also make about $70k a year, buy cars that folks who make $100k+ a year would buy.
If my single 10-year old car breaks down and I buy a new Honda Fit for 18k on credit, that’s a far different thing that these coworkers buying a new 50k BMW.
Just food for thought!
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Chris @ Flipping a Dollar says
I don’t agree with your car example at all since it’s constantly losing value. Unless you meant a 1% loan on a $3,000 car that you could recoup most of that money after the 3 years of use. Otherwise it doesn’t hold. A 30k car will be worth a lot less after 3 years of regular use!
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1500 says
I’m guilty of buying new cars (Hey look, 0%!!). I’d never do it again though. I’d encourage you to look at a used Fit with 60,000 or so miles. Make sure it’s been well maintained and drive it for another 190,000 miles.
CharlesMakesCents says
Sorry, I think everybody here got off on the car tangent. As I said:
“If I absolutely HAD to buy a car (which I don’t, because I’m LBYM), I’d be buying one with as much credit as I possibly could.”
I don’t buy new cars. I was just illustrating that when one buys cars, it’s often profitable to do so with borrowed money when that money can be borrowed cheaply. As such, carrying debt alone isn’t a great indicator of whether or not one is living beyond their means.
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CharlesMakesCents says
Hi Chris,
I totally agree that new car purchases are rarely a good idea!
However, our local credit union gives used car loans a 2.4 percent for up to 5 years. Vanguard’s investment-grade bond index fund yields about 4.1%.
Obviously, you take on investment risk by entering the market instead of paying cash, but on a $3,000 car you’d save $51 per year for 5 years by buying on credit and investing that $3,000 in the bond index fund, saving $250 over the lifetime of the loan, essentially lowering the price of the car by 8%.
The cars I used were just an example. Buying with cheap credit and investing the difference is still not an indicator that someone is living beyond their means!
Charles
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Chris @ Flipping a Dollar says
I’m OK with your definition. Having a little bit of positive cash flow each month specifically requires you to have income. I think you should be able to cover all expenses without your regular income to claim to be LBYM. We have a mortgage but could probably last about 5+ years without my wife’s or my income. This would be hard and I’d have to dip into retirement funds but it could be done. Still some good food for thought since it’s not as black and white as everyone thinks!
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1500 says
Five years is a pretty strong emergency fund. Way to go! That is probably 4 years, 11 months longer than the average person.
Chris @ Flipping a Dollar says
Right? I mean, that’s all our IRAs, Roths, and even a 529, but I’m talking about real emergencies here. It really gives me some peace of mind at work. I don’t stress like everyone else does, but then again, it also doesn’t push me to destroy my body for the good of the company and become some super star.
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Vawt says
I think there is definitely some grey area in there. If you have ever tried to define it, you are probably living below your means. If you read this blog, you are probably living below your means.
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1500 says
Right on both points. The couple times that I get hate mail must be from the people who aren’t LBYM…
Brian says
I don’t give you a pass. If you are going to be binary on your rules then you have to follow them no exceptions*.
*I don’t really believe this, but I am just following the rule you put out there.
Man, it is kind of fun to use the old “*” now I see why you do it so much.
1500 says
Ha, thanks for keeping me honest Brian! I’m obsessed with the *! Some day, I will have a post that is nothing but asterisks…
Done by Forty says
I think mortgage debt ought to be given a pass, given how low an interest rate it likely is.
Here’s the distinction: is the person using the delta to invest, or to spend (overall…it’s likely split).
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1500 says
Thanks DB40 for giving me a pass!
Any extra is definitely invested. Save til’ it hurts baby!
Even Steven says
Leverage is a scary thing, it can either make you look like a genius or bankrupt you. Also by putting your finance payments to a larger number of years can be foolish, like buying a car and getting the 84 month repayment plan, sure your monthly payment is lower, but it’s not in your best financial interest.
Thinking out loud, if I bought a truck at $500 monthly payments for 84 months or had the option to get $700 payments at 60 months which would be better? Most on the blog would say neither. What if during that time you took the $200 and put it into an index fund that returned 8%. Then the question might be what is your current interest rate? If it is 4% would this then be good or bad to invest for 84 months? My answer is a hard no because it is a depreciating asset and several other common sense financial assumptions. Does this mean that a appreciating asset is exempt from this though process and would receive a hard yes because your return of 8% is more than your 4% interest if say this was on a house? If we are supposed to start early and often shouldn’t we be putting the maximum amount into the stock market at all times? ……………Where am I
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1500 says
The only way I’d leverage debt is with a house. At least that has a chance of appreciating. Never for a car or anything else.
I wouldn’t even do it for a house if interest rates are higher. We are at a very unusual time in history with money being so cheap.
CincyCat says
2nd comment! 🙂
The only way I can see someone needing to finance a car for more than 36 months is if a car is required to get them to their job, their only vehicle has just died a painful death, and they have not yet had the luxury of *time* to save enough to pay cash outright for another vehicle (some people are still just starting out in this wonderful game of life… 🙂 ). In that case, they need to make sure payments will not be so egregious that they cannot make ends meet on a monthly basis, so a longer payment period may make sense. This exact scenario happened to my husband and I when we were poor newlywed college students. Ever since we got on our feet, though, we’ve always been able to pay off a car within about 2-3 years of purchase.
Gen Y Finance Guy says
Your likely living below your means if:
1 – Your bought a house that was less than you could afford.
We were approved to pay buy up to $750K, we ended up buying a house for $370K.
2 – You have at least 3 months of living expenses in the bank.
The average person can’t come up with $2K in an emergency.
3 – Your cars are paid for.
With rates so low I might be willing to give a pass here if you decide to invest the money instead and buy a reasonable car (this is subjective based on your own financial situation)
4 – You have zero credit card debt.
This doesn’t mean you don’t use a credit card, it just means you don’t carry a balance. You pay it off every month. Meaning you only buy what you can afford.
AND
5 – You are contributing to an investment account (pre-tax or not).
These are the 5 criteria I would use to determine if someone was living below their means or not.
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1500 says
Good points Gen Y. The first one is especially powerful and downsizing was the absolute best thing we did. At one time, we did have a house worth 750K. That was a mistake.
CharlesMakesCents says
Hi GenY Guy,
These are the criteria I’d use, almost to a ‘T’, especially allowing for the use of a credit card as long as you don’t carry the balance.
Get those points!
Charles
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Gen Y Finance Guy says
I am all about those points Charles 🙂
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Zaxon says
Gen Y you have it all wrong…
1) Well you just didn’t spend enough. Your co-workers and “friends” will obviously think less of you.
2) 3 months wasted money? Pshhh… i’m sure your paycheck will cover anything that might happen. Spend baby spend!
3) Dude, you ever hear of leases?
4) Roll those credit cards over baby! Use one to pay off the other.
5) Did you hear about that gold guy from my brother’s sister’s cousin in law? Best investment ever!
=P
Gen Y Finance Guy says
I don’t know what I was thinking Zaxon 😉
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No Nonsense Landlord says
I always wonder when these types of people’s lives will come crashing down. One small job hiccup, or an unexpected expense, and the house of cards could come down.
Of course, they will get debt forgiven at some point, and our expenses will somehow go up…
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1500 says
I know, right? Just file bankruptcy and make it all go away. Oh, and before you do it, go get loans on two new cars so you have no assets the court can seize.
The Professor says
I think you’re being too hard on yourself! A mortgage shouldn’t count against you unless it’s exorbitant. There are also situations where car loans perhaps should not be included. If you live in an area without mass transportation and can’t afford to live close to the office, you have to get to work somehow.
Credit card debt, on the other hand, is another ball game . . .
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Kara says
I think LBYM is consistently living frugally with no debt. I personally have $4,600 left in student loan debt but I definitely live below my means. All my money (there’s just not very much of it) goes towards loans and the bare essentials: rent, gas, internet, food. I don’t incur credit card debt, I don’t buy frequently or expensive things. So even though I have debt, I definitely consider myself LBYM.
brian says
Perhaps its my own biases, but i basically discount anyone who has a loan/lease on their car as being financially smart. Cars are such a money pit, and most people never consider the true cost…i simply can’t imagine wanting a car bad enough to lease one and pay a ridiculous rate just to have a slightly newer car.
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David of the Debt Free Guys says
It’s interesting that you choose to add ‘no debt’ as a factor. We choose to not include that, but that you are reducing rather than increasing or maintaining your debt.
Of course debt such as personal loans, credit cards and other revolving debt are an absolute no no. Although when you think about it, going out and buying a car and getting a loan can contribute to your living beyond your means.
I ultimately think that living below your means, means that you are spending less than you make and using the difference to invest so that your wealth will allow you to no longer be anchored to working for someone else. That is my dream and goal. It’s coming soon! 😉
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CincyCat says
Long-time reader, I think this is the first time I’ve commented, though.
I don’t know if I would require “no debt” to be on the list, especially not mortgage debt. I think there are some big-ticket expenses that occur where leveraging temporary strategic debt to finance (such as a necessary repair or maintenance project, not a cosmetic update). To me, this makes sense in order to keep overall monthly cash flow in the black, and to avoid bleeding liquid savings dry.
For example, we recently updated the windows in our house. They were 40 years old, had cracked vinyl, and had condensation/frost between the panes every winter. We debt-financed with a 12 months, same as cash plan. We paid off the entire initial balance within the promo period, and so we did not acquire any interest. Also, as a result, our energy bill has dropped nearly $100/month. Does the fact that we initially debt financed this purchase automatically disqualify us from “LBYM”? Personally, I don’t think so.
Prudent Pound says
Wow this is definitely a hot topic! You could define LBYM in the very straightforward way (i.e. monthly / annual outgoings are lower than net income) but that misses the point. To really live below your means, you need to do it in spirit, not just “to the letter”. To me this means:
1) Having an emergency fund (I’d go for a least 6 months expenses) – this is the most basic necessity
2) No debt (only exception is for a mortgage – but it needs to be a sensible mortgage than you can, and do, easily overpay into each month)
3) Monthly contributions to a pension / investment / savings account (as you prefer)
4) Spending on the things you need, as well as potentially a few wants – but keeping your overall spending well below your income – 20% seems reasonable (as you can LBYM without necessarily being committed to retiring early and the associated higher savings rate!)
You know you’re really LBYM in spirit when you constantly walk around having that overall feeling of contentment / peace that having just some financial security gives you!
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Gregory Allen says
Totally agree – any kind of debt breaks up the idea of LBYM.
Just a small remark, living below your means can bring you to financial independence. But only in case when you’re trying to increase your earnings along with cost-cutting.
Chris Miller says
I believe that the most important thing is to increase the income while not increasing the costs. I think that the cost reduction is not significant then.
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