1500 Days to Freedom

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Ask the Readers: What does living below your means really mean?

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BackNColo suggested that I buy a Tesla X with the hover option...
BackNColo suggested that I buy a Tesla X with the hover option…

Hi there, Mrs. 1500 finally back at the helm, after a couple of weeks off.

I had an interesting conversation with a neighbor, who thinks she lives below her means. What does that really mean?

But first, let’s go back to last week’s question, where Mr. 1500 asked how you would invest $275,000.

Chris from Flipping a Dollar, Fervent Finance, Reader Danny, BackNColo, The Roamer, Mr. FSF, Reader Jenni and Reader G-dog all said VTSAX, and then leave it alone to grow.

BackNColo also suggested a Tesla Model X with hover mode. Thanks, but we already have a Model X, which is what the Honda Element was code-named before it came out as the Element.

Mr. FSF also suggested a new motorcycle. This is pretty funny, as I have been trying to convince Mr. 1500 that he needs a motorcycle. He owned one when we got married, I got my license shortly before I started having babies, and we both enjoy them very much. I want him to get one, but he keeps delaying gratification…

Longterm Reader, Second Time Commenter is looking ahead, and feeling a Fed rate hike/stock downturn, which would equal a buying opportunity. She suggests short-term CDs for now. I agree with her that the market is due for a correction, but it is difficult to time, so we will be investing now, and then buying more if/when the correction happens. Thanks for reading, and taking the time to comment. (And I like your name just fine…)

Frugal Fighter Pilot started off recommending gold bullion, and I thought he was serious. He wasn’t, and jumped on the VTSAX wagon as well.

May from Messy Money suggested a Lamborghini. Look for a guest rant from her in the upcoming weeks…

Thanks for the suggestions. Mr. 1500 wrote a follow up on Tuesday, about what he did with that $275,000. There were some suggestions from several readers that were so compelling, he adjusted how he was going to invest that money, and he wrote a correction on Wednesday. So thanks to everyone for their suggestions. Our portfolio looks just a bit different, thanks to you.

And now back to this week’s question, What does living below your means really mean?

I recently had a conversation with a neighbor who said, “Well, we live below our means.” This statement seems absolutely ridiculous coming out of her mouth, because if ever there was someone who spent like their life depended on it, it is this woman. But she made me start thinking, “What does that even mean?”

I feel fairly confident that the 1500’s live below our means, because we live on about 1/3 of Mr. 1500’s take-home pay. But where is the line drawn?

This family down the street may spend less than they take in, but I would venture a guess that they bring in $100,000 and save $2,000.

So readers, tell me. What does it mean to live below your means?

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Comments

  1. What a good question! Clearly it’s subjective. I save 25% of my salary and wish i could save 30-40%. But I’m too set in my ways, I guess. Haha. I’m sure there are others who would wish for my numbers.

    • 25% is more what I was thinking to qualify for living below your means. And you are right, many people would love to have your numbers.

  2. Interesting question Mrs 1500 – one of those things that seems obvious until you really think about it!

    For me, if you’re living the lifestyle you really want (i.e. doing work you care about or want to do, and something you can sustain), and spending less than you earn, then you’re living below your means. If you hate your work and are only doing it for the money to pay for the huge mortgage or car loans, and are only just getting by, then you probably have a long way to go before you’re truly living below your means.
    Jason@Islands of Investing recently posted…Putting a value on the things you truly valueMy Profile

    • Yes, when I heard her say she lives below her means, I thought to myself, “No you don’t. You couldn’t possibly live below your means.” But when I tried to define it in my head, I had a hard time.

  3. I suppose it technically means spending less than you earn. But by that metric, one could make $100K, spend $99K and still be “living below their means.” The problem with that definition, in my opinion, is that it doesn’t get at the true intention or heart of the concept. To me, living below one’s means entails saving a high enough percentage of your earnings such that if you were to lose your job tomorrow, you wouldn’t enter a crisis situation. Rather, you’d have enough saved to continue living comfortably while you plotted your next move. I think for me, it’s all about having enough saved such that you don’t have to worry about money.
    Mrs. Frugalwoods recently posted…A Single Person’s Guide To Frugal and Happy LivingMy Profile

    • I think the neighbor defines it as spending less than they take in, but similar to your example of $100K vs. $99K. She spends freely, buying new cars and new clothes. She buys brand names, and makes sure her kids wear brand name clothes, too. She has a cleaning service once a week, a personal chef 5 nights a week because she is “just too busy” to make dinner during the week. She may spend less than she brings in, but only just. Which seems to defeat the spirit of the idea.

      • Be carefull about judging. You keep indicating that you “think” she makes a $100k but spends almost all of it. You say “venture a guess” so that leads me to believe you don’t have enough info to know or truly quantify. It may be possible that she makes $400k and spends $90k….maybe she has a side business (writes a ridiculous blog that just prints money), maybe they won the lottery or got an inheritance, etc. Us FIRE types get high and mighty when people think we are poor because we don’t spend that much but the inverse could be true as well.

        Anyway, I view living below your means as having your income covering your spending/savings with some degree of flexibility to whether short term storms without much issue.

        • Nope, I wish that were the case. We hear comments like “had to get a second mortgage to pay for the bathroom remodel” or “owe this much on this car.”

          I feel bad for them. In real life, we are positive people and try to influence others gently with kind words, not abrasive ones. We also offer to help our friends and neighbors with projects for free. In her case, we thought that perhaps we had inspired her a while ago: “We’re going to try to redo our kitchen too by ourselves instead of paying $80,000 to a builder!” They have since regressed.

  4. Ha! Good question, and I suspect one that has more to do with philosophy than math.

    My thoughts: If you’re saving for a car or vacation, that’s deferred spending. If you’re saving for your kids’ education and retirement, isn’t that considered living within your means? (Essentially, you save so you can have a comfortable lifestyle in the future.) Ditto with emergency savings — that’s so you can continue to live within your means if something bad happens.

    That being said, I thinking living below your means happens when you live on less so you’re able to share with others. If all of your time and money go into your own lifestyle — now or for the future — I think that’s “within”. “Below” means you can effectively steward your own resources and give back (tithing, volunteering, donations.)

    Just my two cents. I’m curious to see what others thing!

    • Beth,
      I Usually let my husband make the comments, but I just loved how you framed your answer to the question: what living below your means actually means.

      I have given a lot of budget courses to many different people and I always taught them to spend all their money. This meant that they needed to allocate everything that came in: a portion to housing, food, savings, tithing, RRSPs etc.

      So I agree with you that only when you can’t allocate anymore money to your own spending: you are living below your means. Although, you can just allocate more to the tithing column.
      Mrs. FSF recently posted…Car Ownership, Expenses and Fuel MileageMy Profile

  5. Technically, I think that living below one’s means implies that you are investing at a rate that would allow you to one day become financially independent. I don’t think the technical definition necessarily precludes all debt or an expensive lifestyle, but the debt must be at an interest rate lower than expected investment returns.

    I think more practically speaking, living below your means implies that you can make your next three** “life moves*” without sacrificing the position of “living below your means.”

    *By life moves I mean getting married, having babies, reducing an income, changing jobs, physically moving, buying a car, buying a house, deciding to retire, getting very ill, etc.

    **The three moves thing is a strategy I learned in my fourth grad chess club which is basically if you can see the next three best moves (so you-opponent-you or opponent-you-opponent) you are probably in control of the game.

  6. It means there is money left over at the end of the month instead of month left over at the end of the money.

  7. My definition is having an adequate emergency fund and saving enough to meet your retirement goals (whether it’s early or normal retirement age). If you can actually articulate your retirement strategy and do the math you are good to go. I would venture your neighbor will be those 70 year old ladies who is working at the grocery store.

    P.S. Yes i did it 🙂

  8. I think I draw a distinction between living within my means and spending less than I earn. Spending less than I earn just means that I’m breaking even each month at least and not accumulating debt, like your neighbor (probably). Living within my means also includes saving at a decent clip for the future, though I don’t want to assign a percentage to it as it is individual to each situation.

    Another interesting scenario to consider is someone who is in debt repayment mode. After a long period of living beyond his/her means, does decreasing liabilities alone qualify for living within one’s means or is increasing assets a requirement?
    Emily @ evolvingPF recently posted…I Never Aimed for Self-Employment, But Here I AmMy Profile

    • Thanks, Emily.
      This point is interesting as well. Mr. 1500 and I were having a conversation about it, which inspired tomorrow’s post.

    • I had to stop myself from blurting out, “No you don’t!” when she said it. I am sure she has money left over every month, after paying all her bills. But the amount of those bills doesn’t reconcile with the ‘living below your means’ philosophy. At least in my opinion.

  10. I guess I’ve always thought of “living below your means” as having the financial means to afford much bigger/more, but being content/happy with much less.

  11. I’d say old Wilkins Micawber has it:

    Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery.

    Though I do like the distinction a few people here have drawn between “within your means” and “below your means”. Barely managing to avoid going into debt for another month is certainly in keeping with the letter of the phrase, but a little contemptuous of the spirit.

    Or maybe contemptuous is the wrong word, and unfair. When the common message is that 10% is a really impressive monthly savings rate and something to one day aspire to, when people are very impressed that you’re managing to save 2% of literally every pay packet, how can you possibly even imagine 50%?

    I suppose my answer to this week’s question goes something like this. Depends who you ask. On the one hand, within is not below. On the other, we in the PF community only tend to see half the number line. We imagine a monthly change in our net worth that falls between 0 (bad!) and 100% of our net income (the dream!). But there are numbers on the other side of that 0. Evil, negative numbers stretching off not just to minus 100%, but to minus infinity. For “normal” people those numbers are still visible on the horizon, and their siren call is strong. I choose to be impressed by anyone that manages to stay on our side of the line. It’s a great start, and they now need our encouragement to take it further.

    • Wow, nice reply. I think you should have your own blog because your writing is about 10x better than mine! 🙂

      • I agree with Mr. 1500, and also with you. As I keep answering these comments, I feel just a touch snotty and snobbish for my feelings toward her savings rate. I am not the President of her Fan Club, either, and I am sure that comes across as well.
        But the smug look on her face when she said it, coupled with the fact that I have seen a little of what she spends, makes me feel her ‘living below our means’ is within the letter of the phrase, rather than the spirit.
        I want to encourage her, but also feel it will fall on deaf ears. Some people want to change, and others feel entitled to whatever they want.

  12. I’ve never used this phrase to describe our lives because it’s inexact to the point of meaninglessness. I am an accountant, after all.

    It depends on what the word “means” means. To me, by taking home $100,000, you have the means to spend $100,000. And if someone were to say that someone is “living beyond their means,” I would take that to mean they are spending more than the $100,000, or in other words racking up credit card bills. So spending anything less than what you take home technically means you are living beneath your “means.” Culturally, I think people take the phrase “living beneath your means” to mean being seriously frugal, but it depends so much on your own subjectivity. It’s just a shitty phrase.
    Norm recently posted…I Went On Vacation And You Didn’t!: Peru, Part 1My Profile

    • Well that pretty much sums it up. It is a poopy phrase, subject to your own feelings about it.
      I think most people reading this blog have the same basic feeling about it, but it is hard to put into words.
      Spending less than you earn is definitely a start, but saving, investing, planning, and being able to take a financial hit are all part of it as well.

  13. Is this the same neighbor that doesn’t care much for Mr. 1500?? By black and white definition she probably is. But for this community and our subjective definition she probably is definitely not. I’ve really never given the definition of the phrase much thought. To me personally it means saving enough of my income to be financially independent by 40. But I bet everyone has different definitions.
    Fervent Finance recently posted…Liebster AwardMy Profile

    • This is a different neighbor – in fact she is married to a man that the other neighbor would marry, because he ‘let’s her spend whatever she wants’.
      I think all of us reading have the same basic definition of ‘living below your means’ but we all also have a different level of spending that qualifies.

  14. I think it implies that you save some money each month and have no debt (well, except mortgage), and that you have enough that minor set-backs, like major car repair, or a new appliance, won’t destroy your bank account. I think most people say it in regards to “I can buy fancier more expensive stuff without incurring debt, but I choose not to.” But – I think it is a rather tame phrase that probably underestimates 95% of us who read this blog! The words I use in this type of situation are usually something along the lines of “I save an obscene amount of money”.
    Mrs SSC recently posted…WTF: Not everyone wants to retire early?My Profile

    • I like that. For a while, we were not living below our means, probably right at our means or even above our means. While we were doing the bulk of our addition, it seems that every dollar that came in, also went out again. We had a very low rate of savings for about a year. Lots went on credit cards, because they offered ‘No Interest for 24 months!’ and that still isn’t paid off yet because the 24 months isn’t up. (Note: if you don’t finish paying that amount off before the 24 months is up, the entire 24 months’ worth of interest is added to your balance, not just interest on the unpaid portion, so it works if you can pay it off in time, and isn’t really worth it if you can’t.)
      However, we still feel that we live below our means because that was one blip on our savings radar, and having lived below for so long, a blip doesn’t have the effect on us that it would on others.

  15. Dear Mrs. 1500,
    This is almost a trick question. Based on the free dictionary (did someone say frugal?) its defined as follows: live within one’s means; to spend no more money than one has.
    http://idioms.thefreedictionary.com/live+within+means

    Guess by this definition she may be living within her means, albeit this may not be of much help if you don’t have (substantial) savings or an emergency fund (not to mention an F-you money fund).

    We (Mr. and Mrs. FSF) seem to agree with Mrs. Frugalwoods. We also regard living within your means as to be able to absorb a job loss, medical issue or other major financial event without affecting your normal routine/life.
    Mr. FSF recently posted…Car Ownership, Expenses and Fuel MileageMy Profile

  16. I think the technical definition of living below your means has already been brought up by other commenters here. It’s also important to continue to grow your income. Cutting expenses is only part of our goal towards financial indpendence. Our secondary goal of increasing our income allows us to continue to develop, create, and improve things for fun to ultimately create the lifestyle we want for ourselves.
    The DJ @ Freedom35 recently posted…Leveling Up Our FrugalityMy Profile

  17. You’ve got some sharp comment’ers here, 1500’s! To add my 2 cents, I think that LBYM means different things at different life stages. For example, just out of college it meant living like a college student (used car, shared apartment) in order to pay down debt, save for a house/car/emergency, and put whatever you could toward retirement (401k, IRA, taxable…). Then there was a middle LBYM phase where we got married and wanted to start a family, so then it meant ‘investing’ in a house and child-related necessities, all while still saving ‘as much as possible’ (max 401ks, IRAs, 529’s…). The third, and IMHO best LBYM phase is what I call ‘escape velocity’ – when you can live within the passive income generated by those earlier investments.
    Steve@EscapeVelocity2020 recently posted…Couch Surfing / SkiingMy Profile

  18. I would say living below your means translates into living debt free (except perhaps a reasonable mortgage), having cash and an emergency fund and saving at least 15% of your income each month.

    It is tricky because if you are power paying off debt, you could be living below your means now (and not saving), but you clearly were possibly not living below your means previously (except for perhaps student loans).

    There could be some gray areas.

    In other words, I have no idea what it means. 🙂

    Summary: Don’t borrow for crap and save a big pile each month.

  19. Along the lines of what some other commenters have said, the literal definition allows someone to save a dollar at the end of the month, and he’s still technically living within his means.

    But this effectively means he’s living “at” his means, not below it. We need a material delta between someone’s take-home pay and spending.

    I’d say 5% is material. You need to have that kind of savings rate for me to say you’re no longer just spending ‘at’ your means.
    Done by Forty recently posted…Dunning-Kruger and Other People’s MoneyMy Profile

  20. I guess in technical terms it means that you are spending less than you are making, but if you are spending $49,999 out of your $50,000 take home pay each month, is that still true? There has to be some sort of “cushion” provided as in that case you are one expensive emergency away from not living below your means. I’d have to include a emergency fund in the definition so that you could continue that way even after a major setback.
    Debt Hater recently posted…Student Loan Cost After GraduationMy Profile

  21. Your neighbor’s not wrong, but she’s probably just barely inside the line. We think of living below your means as meaning that you could sustain your lifestyle even if you lost a chunk of your income. We’re a DINK household but have always tried to structure our spending so that we could cover everything on one income. We started that out of job fear but turns out it’s a good FI/RE habit too!

  22. For my wife and I it’s 50% (we have similar salaries). We are covered if one of us gets laid off or has an illness. We are not going into debt, but saving at a healthy rate that gives us many options. Saving 50% puts people into the 15-17 year range to retire if starting from $0, we have about 4-5 years left. We are living in a neighborhood that we can afford and not throwing money away on a completely wasteful eyesore that is the McMansion.
    Elizabeth Warren has a great book called the “Two Income Trap” (she used to be a bankruptcy lawyer before a kiss-butt Senator). The two-income trap she refers to goes like this. Today’s two-income family earns 75% more money than its single-income counterpart of a generation ago, but has 25% less discretionary income to cover living costs. Why? Consumer spending, debt, extending your finances to buy into a better school district.
    It’s not the latte that is killing middle-class finances, it’s the school district and the Jonses’.

    • I totally agree that the Joneses are ruining the world! The school district is a little more understandable. I went to a high school in the not-most-awesome part of the world, and after graduation, worked for a woman whose children went to the top school in our state. The vocabulary difference was astounding. The peer pressure in my school was to smoke pot, the peer pressure in their school was to get better grades. And smoke pot. So I get the school district thing a bit more. But those darn Joneses!

  23. Living below your means = spending less than what you’re making. Ideally you’re spending less than your last month’s pay cheques so you’re not living pay cheque to pay cheque. It also means putting money aside for investing and any possible future spending. Saving for possible future spending means you have the money to buy whatever you need instead of getting in debt.
    Tawcan recently posted…Weekend Reading – BBQ Grilling editionMy Profile

  24. Great Question!

    I think there is a spectrum that looks like this:

    Well Below <<<< Below <<<>>> Above >>>> Well Above

    So like many I would agree that the technical definition of living below your means is that you spend less than you take in.

    I would define a person living paycheck to paycheck as someone living within their means. You are one emergency away from a financial catastrophe. You bought the biggest house you could afford. The nicest car you could afford. You do everything you can afford.

    People that live below their means based on my spectrum above have a shot at retiring at 65. These people are likely saving 15% of their income.

    As you move further to the left you find younger retirement ages. These are people that have a shot at early retirement and financial independence in their 30’s, 40’s, and 50’s. People on the farthest left (living well below their means) are saving 50% or more of their income.

    Cheers!

    GYFG
    Gen Y Finance Guy recently posted…Thursday Rant #3 – Dear Boss, You Suck!My Profile

  25. I suspect your neighbor thinks she is living below her means because she has the cash flow to pay all her debtors/bills each month. It’s ‘I don’t care what the car will cost if you can get me a payment of $400 or less per month.”

    Just guessing. I have no better answers than several above. And Kathy’s answer was a beautiful and gracious way to view money’s roles in our lives.

  26. That is an interesting question. I mean the basic definition is that you don’t spend more money than you make. But means change over time. They go up and down. I think for me it is maintaining basic necessities, but the goal of course is to be able to go beyond those bare necessities (break out into song now). So saving enough money to pay for those basic necessities and a few luxuries later on would be an extension of that basic notion of spending less money than you have income for.
    Jason recently posted…Wants, Needs, and “Deserving” ThingsMy Profile

  27. Like people have stated above, lots of people I know live below their means, but that doesn’t mean that they are putting the money they earn towards the lives they really want. I consider myself living below my means, but that means 1/3 of my pay goes towards debt repayment which is getting me closer to a more secure life.

    There are just way too many things out there that are not physically taking out money, but are forcing us to spend it in ways we thing are necessary. They make it into our budgets as necessities and then we are still living in the budget but do not have a healthy one.
    Amanda S @ Passionately Simple Life recently posted…Meaningful SpendingMy Profile

  28. It’s an intentionally vague, socially acceptable and fairly meaningless depending on who says it. In your neighbor’s case, you sense that her fincial footing is weak and so it carries no water. She is likely confusing her ability to make payments on the things she finances as living below her means. You may be able to cover a $600/month payment on a BMW but if you thought about coming up with $65k to buy it outright, it’s unfathomable. That’s the trap of making payments “affordable”.
    Danny MoreBucks recently posted…Choosing the Best Health Insurance (Hint: It’s an HSA)My Profile

  29. It’s an arbitrary cut-off but clearly there’s a line. Someone saving 50% is living below their means. Someone saving 10% is not. I would imagine somewhere between 20% and 30% would qualify as “living below your means” and saving more than 30% would put you solidly in that camp.
    Adam @ AdamChudy.com recently posted…What I’m ReadingMy Profile